House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Losses from non-commercial business activities

Schedule 1 to this Bill amends the ITAA 1997 to improve the integrity of the tax system by limiting the extent to which non-commercial losses from an individual's business activities are used as tax deductions to reduce the tax paid on other income such as salary or wage income.

The amendments will ensure that individual taxpayers carrying on a business activity either alone or in partnership may only claim a loss from that activity in an income year against their other income in that year if they satisfy one of 5 tests.

The new rules do not:

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change the general law tests that determine whether an individual is carrying on a business activity; or

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deny the deductibility of a loss from that business activity. Where a test is not satisfied in an income year, the deductibility of the loss against income not related to the business activity is deferred to a future income year in which a test is satisfied. If the business activity is profitable then any deferred loss can be offset against that profit

Date of effect: The measure will apply to assessments for the 2000-2001 income year and later income years.

Proposal announced: The proposal was originally announced in Treasurer's Press Release No. 74 of 11 November 1999.

Financial impact: New rules will increase revenue as set out in the following table.

Compliance cost impact: A separate regulation impact statement is available for the measures in this Bill.

Deducting prepayments

Schedule 2 to this Bill amends the ITAA 1936 to:

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deny an immediate deduction for prepayments for assets or services in respect of 'tax shelter' type arrangements; and

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spread these deductions over the period during which the assets or services are provided.

The amendments also include consequential amendments relating to this measure.

Date of effect: The amendments will apply to prepayment expenditure incurred by all taxpayers under certain managed arrangements after 1 pm, by legal time in the Australian Capital Territory, on 11 November 1999.

Proposal announced: The proposal was originally announced in Treasurer's Press Release No. 74 of 11 November 1999 (in particular refer to Attachment C).

Financial impact: The financial impact of the new rules is set out in the following table:

Compliance cost impact: A separate regulation impact statement is available for the measures in this Bill.

Summary of Regulation Impact Statement

Regulation impact on business

Impact: The measures contained in this Bill are part of the Government's broad ranging reforms that 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.

The measures may cause an increase in compliance costs for some taxpayers, however these increases will be offset by broader economic benefits from increasing the integrity of the tax system.

Main Points:

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Potential compliance, administrative and economic impacts of the measures contained in this Bill have been carefully considered by the Review and the business sector. Substantial consultation with the business sector was an important part of the Review.

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The measure limiting the extent to which non-commercial losses can be used to reduce the tax paid on other income may lead to increased record-keeping costs for individuals carrying on business activities.

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The measure applying to prepayments for services in respect of 'tax shelter' arrangements will impact on taxpayers who invest in tax shelter arrangements.

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The measures will contribute significantly to the fairness, integrity and equity of the tax system by reducing the opportunities to avoid tax which arise from complexities and certain anomalies in the current taxation legislation.