House of Representatives

Explanatory Memorandum

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

Chapter 8 - Regulation impact statement

Policy objective

The objectives of the New Business Tax System

8.1 The measures in this Bill are part of the Governments broad ranging reforms which will give Australia a New Business Tax System. The reforms are based on the recommendations of the Review of Business Taxation, instituted by the Government to consider reform of Australias business tax system.

8.2 The Government instituted the Review of Business Taxation to consult on its plan to comprehensively reform the business income tax system (as outlined in ANTS). The Review of Business Taxation made 280 recommendations to the Government designed to achieve a more simple, stable and durable business tax system.

8.3 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 that the Government can continue to deliver services to the community.

8.4 The New Business Tax System also seeks to provide a basis for more robust investment decisions. This is achieved by:

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improving simplicity and transparency;

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reducing the cost of compliance; and

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providing fairer, more equitable outcomes.

8.5 This Bill is part of the legislative program implementing the New Business Tax System. Other Bills have been introduced and passed already, and are summarised in Table 8.1.

Table 8.1: Earlier business tax legislation

The objectives of measures in this Bill

8.6 Broadly, the New Business Tax System will enhance Australias competitiveness through lower company and capital gains tax rates, and reduced compliance costs.

8.7 More specifically, the objective of the measures contained in this Bill is to provide an alternative method of calculating taxable income that offers reduced compliance costs for eligible businesses.

Implementation options

8.8 The Government has adopted the recommendations of the Review of Business Taxation to implement the STS, which consists of:

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a new accounting method for STS taxpayers which recognises most business income and expenses when they are received and paid;

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a simplified depreciation regime for depreciating assets which provides an immediate write-off for assets costing less than $1,000 and introduces pooling arrangements for other depreciating assets (a general asset pool and a long-life asset pool); and

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a simplified trading stock regime where changes in the value of stock on hand need not be accounted for if the difference between the opening value of trading stock on hand and the expected closing value of trading stock on hand is not greater than $5,000. This will avoid the need for many small businesses to undertake an annual stocktake for taxation purposes.

8.9 Those recommendations were the subject of extensive consultation. The implementation options to minimise compliance cost for small business taxpayers who elect to become STS taxpayers can be found in A Tax System Redesigned at Recommendations 170 to 170 on pages 575 to 586.

8.10 The Government is also completing the implementation of the recommendations of the Review of Business Taxation relating to the new 12-month rule for prepayments of deductible expenses made by STS taxpayers and individuals incurring non-business expenditure. Those recommendations can be found in A Tax System Redesigned at Recommendations 4.6(c) and 17.2(iv) on pages 172 and 578 respectively. This measure includes a new 12-month prepayment rule under which a deductible advance payment will be immediately deductible where:

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the payment is incurred in respect of a period of service not exceeding 12 months; and

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the period of service ends no later than the last day of the income year following that in which the payment was incurred.

8.11 The Government has announced that the STS and prepayments measures will begin from 1 July 2001.

Assessment of impacts

8.12 The potential compliance, administrative and economic impacts of the measures in this Bill have been carefully considered, by both the Review of Business Taxation and by the business community. The Review of Business Taxation focussed on the economy as a whole in assessing the impacts of its recommendations and concluded that there would be net gains to business, government and the community from business tax reform.

Impact group identification

8.13 The impact group for the STS is businesses which have an annual turnover of less than $1 million and choose to enter the STS. This represents potentially over one million businesses (i.e. 95% of all businesses) ^[F3] . Many of these businesses consist of family businesses and many have few or no employees. Around 65% of these businesses operate as individuals or partnerships.

8.14 The changes to prepayments affect all taxpayers having deductible prepayments expenditure with the exception of businesses (other than small businesses) who are already subject to the general scheme of the prepayments provisions; that is, apportionment of deductions over the eligible service period.

Analysis of costs / benefits

Compliance costs

8.15 A major concern for businesses is the cost incurred in complying with their obligations under the various taxation and other laws. The measures contained in this Bill are designed to reduce compliance costs incurred by businesses who choose to enter the STS.

8.16 As is standard with new measures, groups affected by them are expected to incur a small up-front cost in either familiarising themselves with the new law or having advisors familiarise themselves with the new law and, if necessary, communicating that information to affected taxpayers.

8.17 Eligible small businesses may choose to enter the STS. In deciding to enter the STS, businesses and their advisors are likely to consider any tax savings they may make. In addition, they are likely to consider any compliance cost savings. Small businesses will therefore incur some costs in deciding if they should enter the STS (e.g. time reviewing business records or accounting fees for professional advice). Similarly, before deciding to leave the STS, businesses will go through the same comparison of tax liabilities to help them with their decision making process.

8.18 As previously cited, over 95% of businesses and around 99% of farming businesses are expected to be eligible for the STS.

8.19 The implementation of these 3 measures is intended to reduce the level of documentation that small business taxpayers are required to prepare for taxation purposes as well as reduce labour and other on-going costs required to meet their tax obligations.

Accounting method for STS taxpayers

8.20 It is expected that the accounting method for STS taxpayers will reduce compliance costs. For tax purposes, these taxpayers will largely be able to rely on their day-to-day records (cash book and bank statements) rather than prepare separate accounts for tax purposes.

8.21 From ABN registrations to date, for registrants who have indicated their annual turnover is up to $1 million, 85% have indicated that they will account for GST on a cash basis. Taxpayers who are eligible and choose to enter the STS will also be required to account for income tax on a cash basis. They will not be required to have different methods of accounting for GST and income tax.

Simplified depreciation system

8.22 The level of compliance savings from this measure will depend on the quantity of depreciating assets held by the small business taxpayer. Simplification is achieved by pooling qualifying depreciating assets and treating the pool as a single depreciating asset for calculation purposes. The number of calculations required to determine total deductions for depreciation for the year is therefore reduced to the single calculation for the pool.

8.23 The simplified depreciation regime may result in savings in compliance costs because of the reduced complexity in dealing with the disposal of depreciating assets. The proceeds from the sale of a depreciating asset are deducted from the pool balance. This effectively removes the need for balancing charges. No further calculations are required in respect of the depreciating assets for the taxpayer.

8.24 In addition, the immediate deduction for depreciating assets which cost less than $1,000 will reduce record keeping requirements by removing the need to keep asset schedules for small value assets.

Simplified trading stock system

8.25 The STS trading stock provisions remove the need to account for changes in trading stock if an STS taxpayer reasonably estimates the difference between the value of trading stock on hand at the end of the year and the value of trading stock on hand at the start of the year is not more than $5,000. This means that STS taxpayers who have low or constant levels of trading stock will not have to do stocktakes or value their actual trading stock on hand at the end of the income year. The removal of these obligations is expected to reduce compliance costs for these taxpayers. The amount of reduction in compliance costs will depend on the stocktaking practices of each business.

12-month prepayment rule

8.26 The current 13-month prepayment rule used by small business taxpayers and all taxpayers incurring deductible non-business expenditure will be replaced by a new 12-month prepayment rule. The new rule will apply to all STS taxpayers, and individuals incurring non-business expenditure. Previously, prepayments for these taxpayers have been:

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immediately deductible if they were under an agreement for the doing of a thing within 13 months of the prepayment date; or

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deducted on an apportioned basis over the period of service if the period was 13 months or more.

8.27 Under the 12-month prepayment rule, an advance payment will be immediately deductible where it is incurred in respect of a period of service not exceeding 12 months and the period of service ends no later than the last day of the income year following the date on which the payment is made.

8.28 For the majority of taxpayers with expenses that are immediately deductible, there will be no change in practice.

8.29 Small business taxpayers not entering the STS and non-individual taxpayers who are incurring deductible non-business expenditure will move to the general scheme of the prepayments provisions; that is, their deductions for incurred deductible prepayments expenditure will be apportioned over the service period. These taxpayers will receive the balance of the transitional arrangements put in place at the time that businesses (other than small businesses) moved from the 13-month rule to apportionment. Additionally, the limit on the amount of prepayments receiving the transitional treatment will be set in respect of prepayment expenditure incurred in the income year including 30 June 2001, rather than the year including 21 September 1999. This will reduce the one-off compliance costs associated with the transition to apportionment.

Administrative costs

8.30 In the first year of STS it is expected the ATO will incur additional administration costs in updating systems and tax returns and in providing advice to taxpayers on the new system. The ATO will also incur on-going costs in monitoring the system including assessing the eligibility of small business taxpayers entering the system. These costs in administering the system will be funded from existing resources. In the longer term, administration costs should decrease as the need for advice on the STS decreases.

8.31 The ATO will allocate approximately $2 million in funds for direct costs in the education of taxpayers, preparation of information brochures, worksheets, electronic record keeping packages and other packages which will provide information to taxpayers on the STS to assist them in meeting their obligations under the new system.

Government revenue

8.32 The financial cost to revenue as a result of the STS is expected to be as follows:

8.33 The financial cost to revenue as a result of the prepayments measure is expected to be as follows:

Economic benefits

8.34 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.

Other issues - consultation

8.35 The consultation process on these measures commenced with the release of documents on business tax reform. The STS is discussed in A Tax System Redesigned in which the Review of Business Taxation canvassed options and issues and sought public comment.

8.36 The ATO and Treasury held numerous public seminars and focus group meetings with stakeholders in the taxation system. The views of representatives of the professional bodies and businesses which will be affected by this measure were sought, 376 submissions from the public on reform options were received and analysed. Further details are contained in paragraphs 12 to 16 of the Overview of A Tax System Redesigned.

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

8.38 Further consultation was undertaken by the ATO and Treasury in the development of the STS legislative package. This included considering submissions and having discussions following the public release of STS Exposure Draft legislation for comment in October 2000.

Conclusion

8.39 The STS will free up time for small businesses to focus on their day-to-day operations. Accordingly, the measures contained in this Bill should support a more efficient, innovative and internationally competitive Australian business sector.