Supplementary Explanatory Memorandum
General outline and financial impact
Amendments to the New Business Tax System (Simplified Tax System) Bill 2000
The amendments to the New Business Tax System (Simplified Tax System) Bill 2000 make minor changes of a technical or clarifying nature. The amendments will ensure the Simplified Tax System operates as intended. A number of the amendments are necessary in order to bring this Bill into line with the new Division 40 concepts contained in the New Business Tax System (Capital Allowances) Bill 2001, which is being debated cognately with this Bill. Also, a new measure will remove the cap on prepayments made by non-STS small business taxpayers and non-business prepayments made by non-individuals who are subject to the prepayment transitional arrangements.
Date of effect: The amendments apply to assessments for income years commencing after 30 June 2001.
Proposal announced: Not previously announced.
Financial impact: The amendments will result in cost to the revenue of less than $1 million per annum.
Compliance cost impact: The amendments will involve no additional compliance costs. The prepayment amendment will reduce the compliance costs of non-STS small business and certain non-individual taxpayers (in respect of certain non-business expenditure).
Chapter 1 - Amendments to the New Business Tax System (Simplified Tax System) Bill 2000
Outline of chapter
1.1 The New Business Tax System (Simplified Tax System) Bill 2000 (this Bill) introduces a Simplified Tax System (STS) for certain small businesses and a new 12-month rule for prepayments. The STS has 3 main elements:
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- new accounting arrangements for STS taxpayers which recognise most business income and deductions only when they are received and paid;
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- a simplified trading stock regime where, in certain circumstances, changes in the value of trading stock do not have to be accounted for and annual stocktakes do not have to be completed; and
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- a simplified depreciation regime under which depreciating assets costing less than $1,000 are written-off immediately. Most other depreciating assets will be pooled and will enjoy an accelerated rate of depreciation.
1.2 The new 12-month rule applies to prepayments of certain deductible expenses made by STS taxpayers and individual taxpayers incurring non-business expenditure.
Explanation of amendments
1.3 Changes the heading of section 328-5 from Subdivision to Division.
1.4 Changes a reference in the table of sections from Subdivision to Division.
1.5 Amends paragraph 328-105(1)(b) to provide for a constructive payment rule by inserting the words or it was paid for you. This mirrors the constructive receipt rule contained in subsection 6-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997) (see note to paragraph 328-105(1)(a)).
1.6 Amends paragraph 328-105(2)(c) to provide for a constructive payment rule (as explained in amendment 3) by inserting the words or for you.
1.7 Amends section 328-110 to insert a new subsection (6) that ensures that section 70-15 of the ITAA 1997 correctly interacts with the STS rules when a taxpayer enters the STS. Where section 70-15 defers a deduction for trading stock, this amendment ensures that a deduction is available to the STS taxpayer when the goods form part of stock on hand (even though the expense had been paid in an earlier year). This amendment is necessary because the STS provisions override the operation of section 70-15 of the ITAA 1997, whilst a taxpayer is within the STS regime.
1.8 Amends subsections 328-175(2) and (3) as a consequence of the new Division 40 of the ITAA 1997 (Division 40 is contained in the New Business Tax System (Capital Allowances) Bill 2001).
1.9 Omits subsection 328-175(5) as buildings are already excluded from the STS under subsection 328-175(2) of this Bill. A new provision is inserted as subsection 328-175(5) to provide for the exclusion of horticultural plants (including grapevines) from the STS depreciating asset pool. Horticultural plants are dealt with under the new Division 40 of the ITAA 1997 regardless of whether the taxpayer is an STS taxpayer.
1.10 Amends subsection 328-175(7) to add a reference to Division 42-L. This ensures that assets allocated to pools formed under that Division will not also be included in an STS pool.
1.11 Amends subsection 328-185(1) to clarify that low cost assets mentioned in the subsection refer only to those low cost assets deductible under the STS low cost asset provisions (section 328-180) of this Bill.
1.12 Amends subsection 328-205(1) to make it clear that an STS taxpayers estimate of business use of a depreciating asset will be in respect of the first year they use, or have installed ready for use, the depreciating asset as an STS taxpayer.
1.13 Removes subsection 328-205(3) and replaces it with a new subsection 328-205(3). The subsection ensures that the taxable purpose proportion of the depreciating assets adjustable value, and an amount included in the second element of cost, is the proportion estimated under subsection (1) or (2).
1.14 Where an adjustment for the depreciating asset has been made under section 328-225 it is the estimate of use for a taxable purpose under section 328-225 that is used to determine the taxable purpose proportion of an amount included in the second element of cost.
1.15 Rewords the example in subsection 328-210(3) to more clearly express the formula.
1.16 Confirms that, for each year an STS taxpayer might have to make an adjustment under section 328-225, they must also make an estimate for that year of the proportion a depreciating asset is used for taxable purposes. Where the taxpayers estimate varies by more than 10 percentage points, an adjustment to the pool balance is needed.
1.17 Ensures that the defined term asset value in the formula in subsection 328-225(3) includes not only the original cost of the asset but also any amounts included in the assets second element of cost.
1.18 Inserts the heading Exceptions before subsection 328-225(5) to aid interpretation.
1.19 Amends subsection 328-225(5) to ensure that the exception provided under this subsection applies not only to adjustments but also to estimates.
1.20 Amends subsection 328-295(2) to ensure that the subsection does not apply where the STS taxpayer has chosen to account for trading stock under subsection 328-285(2).
1.21 Amends paragraph 328-365(1)(b) by replacing the reference to or with and. This ensures that both input tax credits and increasing adjustments are ignored for the purposes of the $1 million turnover threshold for eligibility to enter the STS.
1.22 Amends paragraph 328-365(1)(c) to clarify that the values of both the depreciating assets that the taxpayer holds and those that are held by the taxpayers related entities are taken into account when ascertaining whether or not the taxpayer is eligible to enter the STS.
1.23 Changes the reference in subsection 328-365(2) from STS affiliates to grouped entities in accordance with the amendment made by amendment 20.
1.24 Amends subsection 328-365(2) to insert a reference to the low value pool.
1.25 Removes the reference to you hold in the note to subsection 328-365(2) as this reference may not be relevant in all circumstances.
1.26 Removes subsections 328-365(4) and (5). These subsections are re-inserted as subsections 328-380(8) and (9) (see amendment 31). This amendment ensures that these subsections are located in the appropriate place in this Bill.
1.27 Amends subsection 328-370(2) to clarify the meaning of the reasonable estimation process.
1.28 Amends paragraph 328-370(3)(a) to clarify that a reasonable estimate of the current years turnover may be used in the calculation of STS average turnover.
1.29 Amends paragraph 328-370(3)(b) to remove the reference to 3 years. This amendment ensures that if only one or 2 years are taken into account then a taxpayer will only have to average those number of years when calculating STS average turnover.
1.30 Amends subsection 328-370(4) to clarify that a taxpayers grouped entities are also included when calculating STS average turnoverwhere the business is carried on for part of a year only.
1.31 Amends paragraph 328-375(1)(b) to clarify that the value of business supplies of grouped entities is added only whilst they were grouped with the taxpayer.
1.32 Amends subparagraph 328-380(4)(b)(ii) to remove an obsolete reference to control.
1.33 Inserts subsections 328-380(8) and (9). These subsections were previously contained in section 328-365 (see amendment 24).
1.34 Inserts section 20-157 into Subdivision 20-B. This ensures that any profit made on the disposal of a vehicle that is allocated to an STS pool, where the vehicle was previously leased from another, is not taxed under both Subdivision 20-B and Subdivision 328-D. Subdivision 20-B will not apply in these situations.
1.35 Removes the definition of closing pool balance from subsection 995-1(1) of the ITAA 1997 as it is already included in that subsection in the New Business Tax System (Capital Allowances) Bill 2001.
1.36 Amends the definition of STS affiliate by changing the reference from section 328-365 to section 328-380 (see amendments 24 and 31).
1.37 This amendment replaces subsection 82KZMB(8) and removes subsection 82KZMB(9) because of a technical flaw that would have prevented access to the balance of the prepayments transitional arrangements. The replacement subsection 82KZMB(8) and the removal of subsection 82KZMB(9) will ensure the intended access to the transitional arrangements. The amendment also amends subsection 82KZMB(7) to support the operation of the replacement subsection 82KZMB(8). This has no effect on the operation of subsection 82KZMB(7).
1.38 This amendment replaces subsection 82KZMC(1A) and removes subsection 82KZMC(1B). These changes will remove the proposed new cap (for non-STS small business and non-individuals incurring non-business expenditure) on prepayments eligible for the balance of the prepayments transitional arrangements.