Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Jim Chalmers MP)

Glossary

This Explanatory Memorandum uses the following abbreviations and acronyms.

General outline and financial impact

Schedule 1 – Luxury car tax

Outline

Schedule 1 to the Bill amends A New Tax System (Luxury Car Tax) Act 1999 to tighten the definition of a fuel-efficient vehicle, and to align the indexation rates for luxury car tax (LCT) thresholds.

Date of effect

Schedule 1 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October to occur after the day the Bill receives Royal Assent.

Proposal announced

Schedule 1 to the Bill fully implements the 'Luxury Car Tax – modernising the luxury car tax for fuel-efficient vehicles' measure announced in the 2023-24 MYEFO.

Financial impact

Schedule 1 to the Bill is estimated to increase receipts by $155.0 million over the five years from 2022-23.

All figures in this table represent amounts in $m.

Human rights implications

Schedule 1 to the Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 5.

Compliance cost impact

Schedule 1 to the Bill is expected to have a minimal impact on compliance costs comprising of a small initial impact and no ongoing impact.

Schedule 2 - Denying deductions for interest charges

Outline

The Government will deny deductions for Australian Taxation Office (ATO) interest charges, specifically the general interest charge (GIC) and shortfall interest charge (SIC), incurred in income years starting on or after 1 July 2025.

Removing these deductions will enhance incentives for all entities to correctly self-assess their tax liabilities and pay on time, and level the playing field for individuals and businesses who already do so.

Date of effect

Schedule 2 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October to occur after the day the Bill receives Royal Assent

Proposal announced

Schedule 2 to the Bill fully implements the 'Denying deductions for interest charges' measure in the 2023-24 MYEFO.

Financial impact

Schedule 2 to the Bill is estimated to increase receipts by $500.0 million over the five years from 2022-23.

All figures in this table represent amounts in $m.

Human rights implications

Schedule 2 to the Bill does not raise human rights issues. See Statement of Compatibility with Human Rights — Chapter 5.

Compliance cost impact

Schedule 2 to the Bill does not create any new compliance cost impacts or savings.

Schedule 3 - Extending ATO notification period for retaining refunds

Outline

Schedule 3 to the Bill amends the TAA 1953 to extend from 14 to 30 days the period within which the Commissioner must notify a taxpayer of their decision to retain a refund amount arising from a BAS or another notification under the BAS provisions for verification of information. The extension of this mandatory notification period aims to strengthen the ATO's ability to combat fraud during periods of increased risk of fraudulent activity.

Date of effect

Schedule 3 to the Bill commences on the first 1 July to occur after the day the Bill receives Royal Assent.

Proposal announced

Schedule 3 to the Bill partially implements the 'Strengthening Tax Compliance – Australian Taxation Office Counter Fraud Strategy' measure in the 2024-25 Budget.

Financial impact

Schedule 3 to the Bill is estimated to have a small but unquantifiable financial impact.

Human rights implications

Schedule 3 to the Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 5.

Compliance cost impact

Low compliance cost impact.

Schedule 4 - $20,000 instant asset write-off for small business entities

Outline

Schedule 4 to the Bill amends the IT(TP) Act to extend the $20,000 instant asset write-off by 12 months until 30 June 2025. This will allow small businesses (with an aggregated annual turnover of less than $10 million) to immediately deduct the full cost of eligible depreciating assets costing less than $20,000 that are first used or installed ready for use on or before 30 June 2025. The extension will improve cash flow and reduce compliance costs for small businesses.

Date of effect

Schedule 4 to the Bill commences on:

•

the first 1 January, 1 April, 1 July or 1 October to occur after the day the Bill receives the Royal Assent.

Proposal announced

Schedule 4 to the Bill fully implements the 'Small Business Support – $20,000 instant asset write-off' measure in the 2024-25 Budget.

Financial impact

Schedule 4 to the Bill is estimated to decrease receipts by $290.0 million over the five years from 2023-24.

All figures in this table represent amounts in $m.

Human rights implications

Schedule 4 to the Bill does not raise human rights issues. See Statement of Compatibility with Human Rights — Chapter 5.

Compliance cost impact

Schedule 4 to the Bill is expected to have a minimal regulatory impact.

Chapter 1: Luxury car tax

Outline of chapter

1.1 Schedule 1 to the Bill amends section 25-1 of the LCTA 1999 by:

•

updating the definition of a fuel-efficient car by reducing the maximum fuel consumption for a car to be considered fuel-efficient for the LCT to 3.5 litres per 100 kilometres from the current 7 litres per 100 kilometres; and

•

amending the index number used to index the LCT threshold from All Groups CPI to the motor vehicle purchase sub-group of the CPI.

1.2 The amendments seek to incentivise the take-up of fuel-efficient and electric vehicles and ensure the concessional treatment of fuel-efficient cars is consistent with the Australian Government's National Electric Vehicle Strategy (NEVS).

1.3 All legislative references in this Chapter are to the LCTA 1999 unless otherwise specified.

Context of amendments

1.4 As part of the 2023-24 Mid-Year Economic and Fiscal Outlook, the Government announced that it will modernise the LCT by tightening the definition of a fuel-efficient car and amending the index number used to index the LCT threshold from All Groups CPI to the motor vehicle purchase sub-group of the CPI.

1.5 LCT, as set out in the LCTA 1999, is a tax on the GST-inclusive value of luxury cars and is payable to the Australian Taxation Office by businesses and individuals on any taxable supply or taxable importation of a luxury car, with a luxury car being defined as a car whose LCT value exceeds the LCT threshold.

Indexation of the LCT threshold and fuel-efficient car limit

1.6 The current law provides two LCT thresholds indexed at different rates, a higher threshold that applies to fuel-efficient luxury cars, known as the fuel-efficient car limit which is indexed annually using the index number for the motor vehicle purchase sub-group of the CPI, and a lower threshold that applies to all-other luxury cars, which is indexed annually using the index number for the All Groups CPI.

1.7 At the time of its introduction in 2008, the fuel-efficient car limit was set at $75,000, whilst the LCT threshold for all-other luxury cars was $57,180. Since then, there has been weaker growth in the motor vehicles sub-group of CPI compared to All Groups CPI. Over time, this has caused the differential between these two thresholds to narrow. For the 2024-25 financial year, the fuel-efficient cars threshold sits at $91,387, whilst the threshold for all-other luxury cars is at $80,567.

1.8 Amendments seek to align these indexation rates to ensure that the LCT thresholds will grow at the same pace, ensuring the concessional LCT treatment for fuel-efficient vehicles is maintained.

Fuel-efficient car definition

1.9 The current law prescribes that a fuel-efficient car has a fuel consumption not exceeding 7 litres per 100km as a combined rating under national road vehicle standards in force under section 12 of the Road Vehicle Standards Act 2018.

1.10 The fuel efficiency of internal combustion engine vehicles has improved since the introduction of the fuel-efficient car definition in 2008, resulting in the current definition now being too broad.

1.11 Tightening the definition aims to ensure only electric vehicles or vehicles that are at least partially electrified, such as plug-in electric hybrids will receive the concessional fuel-efficient threshold for LCT.

Comparison of key features of new law and current law

Table 1.1 Comparison of new law and current law

Detailed explanation of new law

Tightening the definition of fuel-efficient cars

1.12 Currently, a fuel-efficient car for the purposes of the LCT is defined as a car which has a fuel consumption not exceeding 7 litres per 100 kilometres.

1.13 These amendments reduce the maximum fuel consumption for a car to be considered fuel-efficient to 3.5 litres per 100 kilometres.

[Schedule 1, item 2, subsection 25-1(4) of the LCTA 1999]

1.14 At the time of the introduction of the current the fuel-efficient car definition in 2008, cars with a fuel consumption of less than 7 litres per 100 kilometres were considered to be low emission vehicles. Developments in engine technology have led to improvements in the fuel-efficiency of internal combustion engine vehicles which has resulted in the current definition being too broad.

1.15 This amendment ensures the treatment of fuel-efficient vehicles for LCT is consistent with the Australian Government's NEVS, by ensuring that only electric vehicles or vehicles that are at least partially electrified, such as plug-in electric hybrids, will receive the concessional fuel-efficient vehicle threshold (the fuel-efficient car limit), thereby incentivising the take up of such vehicles.

Indexation arrangement for all other luxury cars

1.16 The current law provides that the LCT threshold is indexed annually using the All Groups CPI number.

1.17 These amendments update the number used to index the LCT threshold to the index number for the motor vehicle purchase sub-group of the CPI and prescribe that the LCT threshold for the 2024-25 financial year is $80,567.

[Schedule 1, items 1 and 3, subsections 25-1(3) and 25-1(6)]

1.18 This aligns the indexation arrangements for the LCT threshold with the fuel-efficient car limit, thus ensuring that relativities are maintained so that both thresholds grow at the same pace and no longer continue to converge, as well as ensuring that concessions for fuel-efficient cars are appropriately targeted and will complement other changes to incentivise the take-up of fuel-efficient cars in line with the NEVS.

Commencement, application, and transitional provisions

1.19 Schedule 1 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October to occur after the day the Bill receives Royal Assent.

1.20 The amendments apply to taxable supplies and taxable importations of luxury cars on or after 1 July 2025.

[schedule 1, subitem 4(1)]

1.21 The current fuel-efficient definition of 7 litres per 100 kilometres continues to apply to a supply or importation of a car on or after 1 July 2025, where prior to this date the car was first supplied or imported, and the car was used in Australia for a purpose other than that outlined in subsection 9-5(1) of the LCTA 1999. This ensures that the supply of a car on or after 1 July 2025 which falls under these circumstances will not, as a result of the amendments made to the fuel-efficient definition, be subject to a greater amount of LCT than would have otherwise been payable.

[Schedule 1, subitems 4(2) and (3)]

1.22 These transitional arrangements operate to minimise the impact the amendments will have on the market for second-hand fuel-efficient luxury cars. Without the arrangements dealers may offer less for the trade-in of such a car in anticipation of bearing a greater amount of LCT on the re-sale. In addition, the absence of transitional arrangements may lead to an increase in the cost of the affected cars, as dealers may seek to pass on LCT payable to consumers which may ultimately disincentivise the take up of fuel-efficient luxury cars.

1.23 For clarity these arrangements will apply regardless of whether the value of relevant car falls above or below the fuel-efficient car limit.

Chapter 2: Denying deductions for interest charges

Outline of chapter

2.1 Schedule 2 to the Bill amends sections 25-5 and 26-5 of the ITAA 1997 to deny the income tax deductions for amounts of GIC and SIC incurred by a taxpayer.

2.2 GIC and SIC are incurred where tax debts have not been paid on time, or a tax liability has been incorrectly self-assessed and resulted in a shortfall of tax paid, respectively. Both GIC and SIC are currently tax-deductible for all entities.

2.3 The amendments seek to reinforce the requirements imposed on all taxpayers to correctly self-assess their income tax liability, pay their tax on time, and assist in lowering the amount of collectable debt owed to the ATO.

2.4 All legislative references in this Chapter are to the ITAA 1997 unless otherwise specified.

Context of amendments

2.5 As part of the 2023-24 MYEFO, the Government announced that it will deny deductions for GIC and SIC incurred on or after 1 July 2025.

2.6 As set out under Subdivision 280-A in Schedule 1 to the TAA 1953, SIC applies to shortfalls of tax liabilities that are revealed when the Commissioner amends an assessment of an amount of tax payable, whereas GIC is generally imposed on unpaid tax liabilities as set out in Part IIA of the TAA 1953. Both GIC and SIC apply on a daily compounding basis and are charged at uniform rates for all taxpayers that are adjusted to reflect movements in the Commonwealth's cost of borrowing. The GIC and SIC annual rates are 11.36 per cent and 7.36 per cent respectively as at August 2024.

2.7 SIC is intended to ensure that taxpayers who understate their liability in returns that incorrectly self—assess a liability do not receive an advantage, in the form of a 'free loan', over those taxpayers who report and meet their tax liabilities in full by the due date, whereas GIC is also intended to encourage taxpayers to pay their taxes on time. The ability of taxpayers to claim deductions for expenditure incurred for these interest charges can operate to undermine these objectives.

2.8 Denying the deductibility of GIC and SIC will level the playing field for individuals and businesses who already correctly self-assess their tax liabilities and pay tax on time and assist in lowering the amount of collectable debt owed to the ATO.

Comparison of key features of new law and current law

Table 2.1 Comparison of new law and current law

Detailed explanation of new law

2.9 Currently taxpayers may claim deductions on expenditure incurred to the extent that it is for GIC or SIC in the year in which the charges are incurred.

2.10 These amendments deny deductions for GIC and SIC by repealing paragraph 25-5(1)(c) of the ITAA 1997.

[Schedule 2, item 1, paragraph 25-5(1)(c) of the ITAA 1997]

2.11 Taxpayers will continue to have the ability to apply to the ATO and request the remission of any GIC or SIC payable. The Commissioner has the discretion to remit the interest charges where it is fair and reasonable to do so, taking into consideration the circumstances which led to the delayed payment of tax liabilities or the tax shortfall. As provided by PS LA 2011/12, in regard to GIC, circumstances the Commissioner may take into account include but are not limited to where the delay in payment was not the fault of the taxpayer such as in the event of natural disaster, where the delay in payment was caused by the taxpayer but they have taken steps to reduce the severity and impact of the circumstances, or in special situations such as where the taxpayer has a good tax compliance history.

2.12 In relation to SIC as provided in PS LA 2006/8, circumstances the Commissioner may take into account when deciding to remit SIC include but are not limited to where there is a delay in the processing a request to for an amended assessment or where there has been unreasonable delay caused by the ATO in the commencement or completion of an audit.

2.13 As GIC and SIC are no longer deductible, the remittance of the interest charges will no longer be considered an assessable recoupment as provided under subsection 20-20(3) of the ITAA 1997.

2.14 The amendments also insert a new subsection into section 26-5, which provides that without limiting paragraph 26-5(1)(a), the GIC and SIC cannot be deducted under the ITAA 1997.

[Schedule 2, item 3, subsection 26-5(1A) of the ITAA 1997]

2.15 As provided by the General Interest Charge (Imposition) Act 1999 and the Shortfall Interest Charge (Imposition) Act 2005, GIC and SIC may be imposed as a tax to the extent to which they cannot be validly imposed otherwise than as a tax, for example, as a penalty. Therefore, this amendment operates to ensure that the non-deductibility of penalties under section 26-5 applies to deny the deductibility of the GIC and SIC regardless of whether GIC or SIC are formally imposed as penalties or in some other way.

Consequential amendments

2.16 The amendments repeal subsection 25-5(7) of the ITAA 1997 which prevents the double deduction for GIC on a running balance account. This provision is no longer necessary as GIC will no longer be deductible.

[schedule 2, item 2, subsection 25-5(7) of the ITAA 1997]

Commencement, application, and transitional provisions

2.17 Schedule 2 to the Bill commences on the first 1 January, 1 April, 1 July, or 1 October to occur after the day the Bill receives Royal Assent.

2.18 The amendments apply to SIC and GIC incurred in income years commencing on or after 1 July 2025. Linking the application of the amendments to charges incurred on or after the start date is consistent with the established principle of deductibility being tied to when an expense is incurred.

[Schedule 2, item 4]

Chapter 3: Extending ATO notification period for retaining refunds

Outline of chapter

3.1 Schedule 3 to the Bill amends the TAA 1953 to extend from 14 to 30 days the period within which the Commissioner must notify a taxpayer of their decision to retain a refund amount arising from a BAS or another notification under the BAS provisions for verification of information. A reference to 'days' in this Chapter means 'calendar days'. The extension of this mandatory notification period aims to strengthen the ATO's ability to combat fraud during periods of increased risk of fraudulent activity.

Context of amendments

3.2 The TAA 1953 provides the circumstances in which a refund relating to a credit arising under the BAS provisions (as defined by subsection 995-1(1) of the ITAA 1997) may be retained by the Commissioner for verification of information contained in the notification giving rise to the refund. The TAA 1953 also provides the mandatory timeframes for notifying the taxpayer that the refund is being retained. In this Chapter, a 'BAS credit' means a credit arising under the BAS provisions and a 'non-BAS credit' means any other credit.

3.3 Under the current law, the Commissioner must notify a taxpayer by the end of the RBA interest day of their decision to retain a refund of an RBA surplus for verification of information. The Taxation (Interest on Overpayments and Early Payments) Act 1983 provides that the RBA interest day for refunds relating to a BAS credit is the 14th day after the latest of the following days:

•

the day the notification giving rise to the refund is lodged by the taxpayer;

•

the day the taxpayer lodges any outstanding or revised notifications; and

•

the day the taxpayer nominates a relevant financial institution account.

3.4 If the taxpayer is not notified within the mandatory notification period that the Commissioner has decided to retain an RBA surplus for verification of information, the refund must be released to the taxpayer at the end of 14 days.

3.5 An RBA is used by the Commissioner to record the tax liabilities and payments of taxpayers on a single account for businesses, including those that report on the BAS (GST, WET, LCT, PAYGW, PAYGI, FBT, fuel tax credits and deferred company instalments), or other entities that are not registered for GST, including individuals and trustees, with investment income to report via an IAS.

3.6 Operation Protego, an ATO-led investigation into high-volume, large-scale GST fraud, identified the limitations of the current 14-day mandatory notification period. With the assistance of social media, fraudulent schemes are more unpredictable, can be proliferated faster, and to a broader population, than may have been anticipated when the current legislative provisions were drafted.

3.7 During periods of increased risk of fraudulent activity, 14 days is insufficient for the ATO to assess each BAS or other notification under the BAS provisions lodged that has been identified as potentially high-risk to determine if it is necessary to retain the refund for verification of information, and also notify taxpayers. In periods of large-scale fraud events, this can result in the risk that a significant number of high-risk refunds are released to taxpayers without appropriate scrutiny by the ATO.

3.8 The amendments in this Schedule to the Bill aim to combat fraud and reduce the number of fraudulent refunds issued by giving the ATO more time to assess potentially fraudulent statements that support BASs or other notifications under the BAS provisions.

Detailed explanation of new law

3.9 Schedule 3 to the Bill requires the Commissioner to notify the taxpayer before the end of the 16th day after the RBA interest day of their decision to retain a refund of an RBA surplus relating to a BAS credit for verification of information. This means the mandatory notification period for retention of a refund relating to a BAS credit is 30 days, instead of the previous mandatory notification period of 14 days. This amendment aligns the notification period for refunds relating to a BAS credit with the notification period for refunds arising from an income tax return.

[Schedule 3, item 1, subparagraph 8AAZLGA(3)(a)(i) of the TAA 1953]

3.10 The 30-day mandatory notification period applies to any RBA surplus on an RBA that contains a credit arising directly under the BAS provisions. This includes an RBA surplus that comprises both a BAS credit and another non-BAS amount allocated to the same RBA. Accordingly, where there are credits on the RBA relating to a BAS credit and a non-BAS credit then the 30-day mandatory notification period applies to the sum of the credits. Where there is a BAS credit and a non-BAS debit, the 30-day mandatory notification period applies to the BAS credit as reduced by the debit. Non-BAS amounts allocated to an RBA are taken into account even where they arise prior to allocation of a BAS credit to that RBA, provided they exist at the time the BAS credit arises. [Schedule 3, item 2, subsection 8AAZLGA(3A) of the TAA 1953]

3.11 The Commissioner can retain a refund relating to a BAS credit for up to 30 days whilst determining whether further verification of information is necessary. If the Commissioner does not notify the taxpayer that the refund is being retained before the end of 30 days, the refund must be released to the taxpayer.

3.12 The mandatory notification period of 30 days provides the ATO with additional time to assess BASs and other notifications under the BAS provisions that give rise to a refund to determine whether it is necessary to retain the refund to verify information contained in the statement.

3.13 A refund that is not reduced relating to a BAS credit retained for over 14 days to verify information accrues interest from the day after day 14 until the end of the day the refund is paid (see section 12AA of the Taxation (Interest on Overpayments and Early Payments) Act 1983). This limits the potential impact on compliant taxpayers affected by the extension of the mandatory notification period. A refund may be reduced due to fraud or evasion or if it has otherwise been incorrectly claimed.

Example 3.1 Refund notification period

Harvey is registered for GST as a convenience store owner and lodged a BAS on 28 October (day 0) claiming an unusually high amount of input tax credits of $100,000. This results in an RBA surplus of $100,000 that the ATO must refund to Harvey, unless the ATO notifies Harvey that they are retaining the refund for verification. The ATO is experiencing a period of increased high-risk BAS lodgments. The amount claimed by Harvey is flagged as a high-risk refund requiring review by the ATO.

•

Existing law

-

Since the ATO has detected a significant increase in high-risk BAS lodgments, they have not completed making its decision regarding Harvey's $100,000 refund by 11 November (day 14). On 12 November (day 15), Harvey's $100,000 refund is released to him by the ATO.

•

New law

-

With the extended time for the ATO to notify taxpayers of a decision to retain refunds for further investigation and verification, the ATO is able to make a decision about Harvey's refund. The ATO contacts and informs Harvey that his refund will be retained for verification on 14 November (day 17). Harvey's refund will accrue interest from the end of 11 November (day 14) until his refund is released, unless the amount is reduced for any reason, including that the BAS was affected by fraud or evasion.

3.14 Consistent with the requirement prior to the amendments, the Commissioner must notify the taxpayer within 14 days of their decision to retain an RBA surplus that does not include a BAS credit for verification of information. If the taxpayer is not notified before the end of 14 days, the non-BAS refund must be released to the taxpayer. [Schedule 3, item 1, subparagraph 8AAZLGA(3)(a)(ii) of the TAA 1953]

Commencement, application, and transitional provisions

3.15 Schedule 3 to the Bill commences on the first 1 July to occur after the day the Bill receives Royal Assent. [Clause 2]

3.16 The amendments apply to amounts due to be refunded on or after the commencement of Schedule 3 to the Bill. [Schedule 3, item 3]

Chapter 4: $20,000 instant asset write-off for small business entities

Outline of chapter

4.1 Schedule 4 to the Bill amends the IT(TP) Act to extend the $20,000 instant asset write-off by 12 months until 30 June 2025. This will allow small businesses (with an aggregated annual turnover of less than $10 million) to immediately deduct the full cost of eligible depreciating assets costing less than $20,000 that are first used or installed ready for use for a taxable purpose on or before 30 June 2025. The extension will improve cash flow and reduce compliance costs for small businesses

Context of amendments

Small business entities

4.2 Division 328 of the ITAA 1997 provides a range of income tax concessions for small business entities, including access to the simplified depreciation rules (see Subdivision 328-D). Under section 328-110, an entity is a small business entity for an income year if the entity carries on a business in that year and either:

•

the entity carried on a business in the prior income year and its aggregated turnover was less than a threshold amount; or

•

the aggregated turnover of the entity in the current income year is likely to be less than that threshold.

4.3 The threshold for 2016-17 and later income years is $10 million.

$20,000 instant asset write-off for small business entities

4.4 The instant asset write-off supports small businesses by allowing eligible depreciating assets each costing less than a threshold amount to be immediately deducted. Immediate deductibility reduces the compliance costs associated with business investment as the depreciation of eligible assets does not need to be tracked over time. It also improves cash flow by bringing forward deductions from future years. Small businesses tend to be more vulnerable to cash flow problems than larger businesses as their profitability tends to be more volatile.

4.5 The ongoing legislated threshold below which eligible amounts can be immediately deducted is $1,000 (see section 328-180 of the ITAA 1997). However, the threshold has been temporarily increased over recent years.

4.6 The Government announced in the 2023-24 Budget that it will support small businesses by temporarily increasing the instant asset write-off threshold to $20,000, from 1 July 2023 until 30 June 2024.

4.7 The Government announced in the 2024-25 Budget that it will support small businesses by extending the $20,000 instant asset write-off by 12 months until 30 June 2025.

Summary of new law

4.8 Schedule 4 to the Bill amends the IT(TP) Act to extend the $20,000 instant asset write-off by 12 months until 30 June 2025. The $20,000 asset threshold applies to the cost of eligible depreciating assets, eligible amounts included in the second element of the cost of a depreciating asset, and general small business pools, until 30 June 2025.

4.9 Schedule 4 to the Bill also extends the deferral of the 'lock-out' rule for small businesses that previously opted out of the simplified depreciation rules to 30 June 2025.

4.10 Without the amendments, the asset threshold would revert to the ongoing legislated threshold of $1,000 from 1 July 2024.

Detailed explanation of new law

4.11 The $20,000 threshold that applies to the cost of depreciating assets, amounts included in the second element of a depreciating asset's cost, and the low pool value deduction under the simplified depreciation rules applies until 30 June 2025.

Deductions for depreciating assets

4.12 A small business entity that has elected to use the simplified depreciation rules in Subdivision 328-D of the ITAA 1997 for an income year may immediately deduct or 'write off' the taxable purpose proportion of the cost of an asset acquired for less than a threshold amount.

4.13 The 'taxable purpose proportion' of a depreciating asset is defined in subsection 328-205(3) of the ITAA 1997 and in general terms represents the proportion of an asset's use in an income year that is for the purposes of producing assessable income. The deduction for assets that cost less than the threshold is claimed in the income year in which the asset is first used or installed ready for use for a taxable purpose.

4.14 The ongoing legislated threshold is $1,000. The amendments in Schedule 4 to the Bill build on the 2023-24 Budget announcement. That announcement was to increase the instant asset write-off threshold to $20,000 from 1 July 2023 until 30 June 2024.

4.15 The amendments implement the 2024-25 Budget announcement by extending the $20,000 threshold by 12 months until 30 June 2025. That means the $20,000 threshold applies to depreciating assets first used or installed ready for use for a taxable purpose on or before 30 June 2025. [Schedule 4, item 3, paragraph 328-180(4)(d) of the IT(TP) Act]

4.16 A consequential change is made to the heading to section 328-180 of the IT(TP) Act to reflect the increased threshold end date of 30 June 2025. [Schedule 4, item 1, the heading to section 328-180 of the IT(TP) Act]

Deductions for amounts included in the second element of the cost of depreciating assets

4.17 A small business entity can also immediately deduct an amount included in the second element of a depreciating asset's cost (for example, an amount spent on improving or transporting a depreciating asset), provided the amount is:

•

less than the threshold;

•

the first such amount to be deducted in respect of the asset; and

•

the asset was written off (its cost was fully deducted) in a previous income year.

4.18 The ongoing legislated threshold is $1,000. The amendments extend the $20,000 threshold for 12 months until 30 June 2025. That means an amount included in the second element of cost must be less than $20,000 and included in the second element of cost on or before 30 June 2025. [Schedule 4, item 4, subparagraph 328-180(5)(e)(ii) of the IT(TP) Act]

Example 4.1

Thomas, a bricklayer, is a small business entity and has elected to use the simplified depreciation rules.

Assets below the threshold

On 1 September 2024, Thomas purchases a tablet for $4,000 to be used 100 per cent for business purposes. Thomas can use the instant asset write-off to immediately deduct the full cost of the tablet as it is below the asset threshold of $20,000.

Assets exceeding the threshold

On 1 December 2024, Thomas purchases a ute for $50,000. He estimates he will use the ute 50 per cent of the time for his business, and 50 per cent for private purposes.

Thomas cannot use the instant asset write-off as the total cost of the ute ($50,000) exceeds the asset threshold of $20,000.

Instead, the $25,000 taxable purpose proportion of the cost of the ute ($50,000 multiplied by 50 per cent) is allocated to Thomas' general small business pool. Thomas can claim a deduction of $3,750 (15 per cent multiplied by $25,000) in his 2024-25 income tax return. Deductions for later income years will be calculated as 30 per cent of the opening pool balance of Thomas' general small business pool.

Amounts included in the second element of cost of an asset

Thomas used the instant asset write-off to immediately deduct the cost of a cement mixer that is used 100 per cent for business purposes in a prior income year. On 1 March 2025, Thomas incurs a cost of $400 to improve the asset. This is the first amount included in the second element of the cost of the asset.

Thomas can claim an immediate deduction for the full amount included in the second element of the asset's cost ($400 improvement) under the instant asset write-off.

However, if Thomas subsequently includes another amount in the second element of the cost of the asset, that expenditure will instead be allocated to Thomas' general small business pool.

Deductions for low pool values

4.19 A small business entity can also deduct the balance of its general small business pool at the end of an income year if the balance of the pool at the end of the year is less than a threshold amount. For this purpose, the balance of the pool is determined prior to calculating any deductions in respect of the pool for the income year.

4.20 The ongoing legislated threshold is $1,000. The amendments extend the $20,000 threshold until 30 June 2025. That means if the balance of a small business entity's general small business pool is less than $20,000 at the end of an income year that ends in the relevant period on or before 30 June 2025, the entity can claim a deduction for the entire balance of the pool in that income year. [Schedule 4, item 4, subparagraph 328-180(6)(e)(ii) of the IT(TP) Act]

Deferral of five year 'lock-out' rule

4.21 A small business entity that elects to apply the simplified depreciation rules in an income year, and then does not choose to apply the rules for a later income year in which the entity satisfies the conditions to make this choice (that is, the entity 'opted out'), is not able to apply the simplified depreciation rules for a period of five income years. This restriction commences from the first of the later years for which the entity could have made the choice to apply the rules. This rule is commonly referred to as the 'lock-out' rule.

4.22 The operation of the lock-out rule has been modified over recent years so that small business entities did not need to apply the lock-out rule to income years if any day in the year occurs on or after 12 May 2015 and on or before 30 June 2024 (referred to as the 'increased access years').

4.23 The amendments suspend the operation of the lock-out rule for a further 12 months to 30 June 2025. As a result of this suspension, small businesses that had opted out can choose to apply the small business simplified depreciation rules and take advantage of the $20,000 threshold. [Schedule 4, item 2, paragraph (b) of the definition of 'increased access year' in subsection 328-180(1) of the IT(TP) Act]

Commencement, application, and transitional provisions

4.24 Schedule 4 to the Bill commences on:

•

the first 1 January, 1 April, 1 July or 1 October to occur after the day the Bill receives the Royal Assent.

4.25 Subject to the timing of the passage of the Bill, the amendments may apply retrospectively. The changes are wholly beneficial to entities affected by the amendments.

Chapter 5: Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Treasury Laws Amendment (Tax Incentives and Integrity) Bill 2024

Schedule 1 – Luxury car tax

Overview

5.1 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

5.2 Schedule 1 to the Bill amends section 25-1 of the A New Tax System (Luxury Car Tax) Act 1999 to:

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update the definition of a fuel-efficient car by reducing the maximum fuel consumption for a car to be considered fuel-efficient for the LCT to 3.5 litres per 100 kilometres from the current 7 litres per 100 kilometres; and

•

amend the index number used to index the LCT threshold from All Groups CPI to the motor vehicle purchase sub-group of the CPI to ensure that both thresholds grow at the same pace and no longer continue to converge.

5.3 The amendments seek to incentivise the take-up of fuel-efficient and electric vehicles and ensure the concessional treatment of fuel-efficient cars is consistent with the Australian Government's National Electric Vehicle Strategy (NEVS).

Human rights implications

5.4 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

5.5 This Schedule is compatible with human rights as it does not raise any human rights issues.

Schedule 2 - Denying deductions for interest charges

Overview

5.6 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

5.7 The Schedule amends the Income Tax Assessment Act 1997 to ensure that the general interest charge and shortfall interest charge are no longer tax deductible.

5.8 This is intended to encourage taxpayers to pay their tax in full and on time, level the playing field for individuals and businesses who already correctly self-assess their tax liabilities and pay tax on time and assist in lowering the amount of collectable debt owed to the ATO.

Human rights implications

5.9 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

5.10 This Schedule is compatible with human rights as it does not raise any human rights issues.

Schedule 3 - Extending ATO notification period for retaining refunds

Overview

5.11 Schedule 3 to this Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

5.12 Schedule 3 to the Bill amends the TAA 1953 to extend from 14 to 30 days the period within which the Commissioner must notify a taxpayer of their decision to retain a refund amount arising from a BAS or another notification under the BAS provisions for verification of information. A reference to 'days' in this Chapter means 'calendar days'. The extension of this mandatory notification period aims to strengthen the ATO's ability to combat fraud during periods of increased risk of fraudulent activity.

5.13 The TAA 1953 allows taxpayers to seek review of the Commissioner's decision to retain a refund for verification of information. Schedule 3 to this Bill does not alter the existing review mechanisms available to taxpayers.

5.14 By reducing the risk of fraud and strengthening the integrity of the tax system, the amendments in Schedule 3 to the Bill are ultimately beneficial to taxpayers.

Human rights implications

5.15 Schedule 3 to this Bill does not engage any of the applicable rights or freedoms.

5.16 Schedule 3 to the Bill provides the ATO with additional time to determine whether it is necessary to retain a refund to verify information following lodgement of a BAS or another notification under the BAS provisions. The amendments seek to reduce the number of potentially fraudulent refunds released to taxpayers without appropriate scrutiny by the ATO, and do not affect taxpayers' entitlement to a refund if fraudulent activity has not occurred.

5.17 Accordingly, Schedule 3 to the Bill does not directly advance or limit a relevant human right or freedom.

Conclusion

5.18 Schedule 3 to this Bill is compatible with human rights as it does not raise any human rights issues.

Schedule 4 - $20,000 instant asset write-off for small business entities

Overview

5.19 Schedule 4 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

5.20 Schedule 4 to the Bill amends the IT(TP) Act to extend the $20,000 instant asset write-off by 12 months until 30 June 2025. This will allow small businesses (with an aggregated annual turnover of less than $10 million) to immediately deduct the full cost of eligible depreciating assets costing less than $20,000 that are first used or installed ready for use for a taxable purpose on or before 30 June 2025. The extension will improve cash flow and reduce compliance costs for small businesses.

Human rights implications

5.21 Schedule 4 to the Bill does not engage any of the applicable rights or freedoms.

Conclusion

5.22 Schedule 4 to the Bill is compatible with human rights as it does not raise any human rights issues.