Explanatory Statement
Issued by authority of the Minister for Revenue and Assistant TreasurerExplanatory Statement
Income Tax Assessment Act 1997
Income Tax Assessment Amendment Regulations 2003 (No. 1)
Section 909-1 of the Income Tax Assessment Act 1997 (the Act) provides that the Governor-General may make regulations prescribing matters required to give effect to the Act.
Subsection 328-375(4) of the Act allows the regulations to provide a different calculation of simplified tax system (STS) group turnover. However, the regulations cannot have the affect of increasing the amount of an entity's group turnover calculation.
The STS is an alternative method of determining taxable income for certain businesses with straightforward, uncomplicated financial affairs who choose to enter the STS. The STS is an optional package that provides eligible businesses new cash accounting arrangements, a simplified trading stock regime and a simplified and more generous depreciation regime. The STS also introduced a new twelve month rule for determining deductions in respect of prepaid expenditure for STS taxpayers.
The purpose of the new regulation is to enable low profit fuel retailers access to the STS by prescribing an alternative calculation of STS group turnover for certain industry groups. This assists entities selling retail fuel by reducing their compliance costs. Previously, there were no regulations to this effect.
Certain criteria must be met for a business to be eligible to enter the STS. One criterion is that the value of STS average turnover of a business and its related businesses for the year must be less than $1 million.
The less than $1 million turnover test excluded small businesses with high turnover but low profit. This was particularly the case for businesses in the retail fuel industry. These businesses are small in nature but were excluded from the STS because of their high turnover.
Despite the high level of turnover from fuel, these businesses tend to be low profit. Profit margins from fuel are so low that sale of fuel is insufficient to be a viable business on its own. All service stations operate a convenience store or a workshop or both in order to remain viable. Retail fuel entities with three components still only return a gross profit of approximately $500,000.
Entities selling retail fuel are essentially small businesses which are generally family owned and operated, employ few staff and have uncomplicated taxation affairs. They are the types of business the STS measure was intended to assist by reducing their high compliance costs.
Calculation of simplified tax system group turnover
The STS group turnover for fuel retailers is calculated by subtracting the value of business supplies for retail fuel from the value of business supplies for all business operations such as the workshop, sales of non-fuel items and non-retail sales of fuel. The 'value of the business supplies' is defined in subsection 960-345(2) of the Act. Fuel includes diesel and liquefied petroleum gas.
The new regulation also relocates the Part 6 heading, and Division 995 heading after new Regulation 328-375.01. The Part 6 heading was wrongly placed when it was inserted by Statutory Rules 2002/172.
Details of the regulations are as follows:
Regulation 1: Names the regulations.
Regulation 2: Provides that Regulations 1 to 3 and Schedule 1 commence on 1 July 2001 while Schedule 2 commences on 6 July 2002.
Regulation 3: Provides that Schedules l and 2 amend the Income Tax Assessment Regulations 1997.
Schedule 1: Inserts a different method of calculating STS group turnover for an income year of fuel retailers. This Schedule inserts new Regulation 328-375.01 into the regulations. This Schedule also provides a definition of retail fuel for the purposes of this Regulation.
Schedule 2: Relocates the Part 6 heading and Division 995 heading after new Regulation 328-375.01. The Part 6 heading was wrongly placed when it was inserted by Statutory Rules 2002/172.
Regulations 1 to 3 and Schedule 1 of the new regulations commence on 1 July 2001 (the date of commencement of the STS). This enables taxpayers to access the maximum benefit of the STS. A start date after this would preclude taxpayers from accessing the benefits of the STS for the 2001-02 income year. Schedule 2 of the new regulations, which relates to the relocation of the heading, commences on 6 July 2002.
As the new regulations do not have the effect of disadvantaging the rights of a person or of imposing liabilities, the requirements of subsection 48(2) of the Acts Interpretation Act 1901 are satisfied, and the new regulations could be made validly to commence retrospectively.
Regulation impact statement
Background
Certain criteria must be met for a business to be eligible to enter the simplified tax system (STS). One criterion is that the value of STS average turnover of a business and its related businesses for the year must be less than $1 million.
The less than $1 million turnover test currently excludes small businesses with high turnover but low profit. This is particularly the case for businesses in the retail fuel industry. These businesses are small in nature but are excluded from the STS because of their high turnover.
Representatives from the automotive fuel retailing industry have indicated that may small businesses selling retail fuel would benefit from the STS. Of approximately 4800 small petrol stations only approximately 2200 are eligible to enter the STS. Around 2600 are ineligible due to their turnover.
The STS was introduced to reduce the compliance costs for small business.
Options available
There are a few options available to the Government regarding retail fuel entities and the STS. The Government may choose not to extend the STS to retail fuel entities (Option A). There are also two options for extending the STS to retail fuel businesses and they are:
- •
- excluding the value of the business supplies relating to the retail sale of fuel (including petroleum, LPG and diesel) when determining the STS group turnover (Option B); or
- •
- excluding the cost of acquiring fuel for retail sale from the value of business supplies when calculating the STS group turnover (leaving only the profit margin in the calculation), essentially a value-added measure (Option C).
Analysis of options
By not creating an exception to include high turnover and low margin retailers of fuel in the STS, the Government is not setting a precedent for other industry groups to apply for similar exceptions.
However, to not create an exception for entities selling retail fuel would mean the continued exclusion from the STS of a group of businesses that are genuinely small in nature.
Option B - Excluding the value of business supplies relating to the retail sale of fuel when determining STS group turnover
Through this option, STS group turnover would be calculated by adding the value of all business supplies, minus the value of business supplies of retail fuel. This method of STS group turnover calculation is simpler for taxpayers to use than Option C.
The compliance costs of excluding the value of business supplies relating to the retail sale of fuel from the calculation of STS group turnover are minimal. This is because entities are already required to have the details of the value of business supplies for GST purposes. These could be extracted and used for STS purposes.
It is estimated that approximately 1800 more retailers of fuel would be eligible to access the STS. This would make approximately 4000 retailers of fuel eligible to enter the STS and leave around 800 retailers of fuel ineligible.
This option would have the greatest cost to revenue. As it excludes the value of all business supplies relating to retail fuel in the turnover calculation, there is scope for more retail fuel entities to be eligible for the STS.
The cost to revenue of excluding the value of business supplies relating to the retail sale of fuel from the calculation of STS group turnover has been estimated as approximately $2 million for each financial year.
The compliance costs and reporting requirements are the lowest under this option. Businesses involved in the retail sale of fuel would need to become aware of the exclusion of their turnover. Retail fuel suppliers already need to have details of the value of business supplies for GST purposes and it will be a relatively simple process to exclude the value of retail fuel supplies from the total turnover to determine eligibility for the STS.
The turnover test is used to determine eligibility to enter the STS. Once a business is eligible to enter the STS all that is required is for them to lodge their return in accordance with the STS: that is, cash accounting, immediate write off of assets below $1000 and a 30 per cent depreciating assets pool.
There may be equity issues with this option. It singles out one group of taxpayers to have their entire turnover for one element of their business to be excluded from turnover calculations, whilst other businesses have to calculate turnover for all aspects of their business.
If Option B were implemented, retail fuel operators would have a significant eligibility advantage over other small businesses, as a proportion of their profits would not be counted towards turnover. Excluding all value in relation to business supplies for the sale of retail fuel would allow some retail fuel operators, who are not in principle small businesses, access to the STS because the calculation fails to include a large proportion of their profit into the calculation of their STS group turnover.
Option C - Excluding the cost of acquiring fuel for retail sale from the value of the business supplies when determining STS group turnover
Under this option, STS group turnover would be calculated by adding the value of business supplies and deducting the cost of acquiring fuel for retail sale. Essentially, only the margin the business makes on the sale of the fuel is calculated in this option, making it a 'value-added' measure.
This option offers treatment that is more equitable to all types of small businesses than Option B. It also provides a more accurate reflection of what retail fuel businesses are actually earning from fuel sales.
If including retail fuel entities in the STS acts as a precedent for other industry groups who would like eligibility exceptions, Option C may be a better model to apply broadly than Option B. The value-added approach is a good measure of business size, and a more widely applicable model than the approach of excluding total value of business supplies relating to a high turnover/low margin activities (Option B).
This alternative would require greater compliance efforts than Option B as entities would be required to determine the value of business supplies and then reduce that amount by the acquisition cost of fuel purchased for retail sale. Businesses would need to be able to isolate the cost of fuel that has been sold on the retail market.
A major difficulty is that a number of commission sites (service stations) that are independently owned receive a commission based on a percentage (usually 3 per cent) of fuel sales. These operators may not know the cost of sales figure.
Another problem that would be associated with implementing this option would be the drafting of an appropriately worded regulation that defines the components of the cost of sales calculation sufficiently clearly to avoid confusion and reduce the risk of a wide interpretation.
There would also need to be some mechanism worked into the regulation that would default the cost of retail fuel sold figure to equal the sales figure if the effect of subtracting the cost of sales from the sales figure results in a negative figure. In many instances fuel retailers will sell the fuel at a loss if the sale is paid for by credit card or a fuel card. This would add complexity to the regulation.
A loss on the sale of fuel, if allowed to be offset against profits from other aspects of the business, may allow a business with a turnover from other activities that exceeds $1 million that would ordinarily be excluded, to offset the loss from fuel in order to qualify for the STS. This could have the effect of allowing businesses to enter the STS who were never intended to benefit from the STS.
The cost to revenue of this proposal is unquantifiable but is expected to be less than $2 million. The cost is expected to be less than Option B, as it does not involve the total exclusion of retail fuel turnover.
Economic benefits
Entities selling retail fuel will benefit by accessing the simplified accounting method and simplified trading stock and depreciation regimes, all of which have reduced compliance costs for small businesses. The STS benefits the Australian economy by providing an internationally competitive business tax system.
Consultation
The Australian Taxation Office has had discussions with and received representations from the:
- •
- Service Station Association in NSW;
- •
- Victorian Automobile Chamber of Commerce;
- •
- Motor Traders Association of South Australia;
- •
- Motor Traders Association of Queensland; and the
- •
- Motor Traders Association of Western Australia.
Recommendation
Treasury recommends Option B. It is considered the compliance cost saving of Option B outweigh any revenue saving that may arise from Option C. Any option to include some part of retail fuel sales would impose significant compliance costs by requiring businesses to identify that particular component of their sales. The reduction in compliance costs was one of the primary intentions of the introduction of the STS.
Industry groups have been consulted in the development of this measure.
Treasury also recommends that the starting date for the regulation be 1 July 2001. This will help businesses decide whether to enter the STS and ease their transition into the STS.