House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Minister for Small Business, the Hon Bruce Billson MP)

Chapter 1 Small business company tax cut

Outline of chapter

1.1 Schedule 1 to the Bill amends the Income Tax Rates Act 1986 (Rates Act) to reduce the company tax rate from 30 per cent to 28.5 per cent for companies that are small business entities with an aggregated turnover of less than $2 million.

Context of amendments

1.2 Small businesses are a key driver of Australia's economy, underpinning growth and innovation and providing jobs for millions of Australians. As part of the Jobs and Small Business package announced in the 2015-16 Budget, the company tax rate for companies that are small business entities is being reduced to 28.5 per cent. The current maximum franking credit rate for a distribution will remain unchanged at 30 per cent for all other companies.

1.3 Providing small businesses with a reduced rate of company tax will improve small business cash flow and assist them to grow and allow small businesses to compete more effectively with larger businesses.

1.4 Over 90 per cent of incorporated businesses (over 780,000 out of a total of 850,000 incorporated businesses, based on Australian Taxation Office figures from 2012-13) fall under the $2 million turnover threshold and could potentially benefit from this measure.

Summary of new law

1.5 This measure will reduce the company tax rate to 28.5 per cent for companies that are small business entities with an aggregated turnover of less than $2 million, from the income year commencing on or after 1 July 2015.

1.6 For all other companies over the threshold, the company tax rate will remain 30 per cent.

1.7 The maximum franking credit that can be allocated to a frankable distribution will be unchanged so the same rate of 30 per cent will continue to apply to all companies.

Comparison of key features of new law and current law

Detailed explanation of new law

Reduction in the corporate tax rate

1.8 The corporate tax rate is reduced to 28.5 per cent for companies that are small business entities (small business companies) with an aggregated turnover of less than $2 million. [Schedule 1, item 1, paragraph 23(2)(a) of the Rates Act]

1.9 The term 'small business entity' takes its meaning from section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997) and includes the requirement that an entity must have an aggregate turnover of less than $2 million in the previous year and are likely to be under the turnover threshold of $2 million for the current year.

1.10 For all other companies that are not small business entities, the corporate tax rate will remain at 30 per cent. [Schedule 1, item 1, paragraph 23(2)(b) of the Rates Act]

Certain large companies

1.11 For certain types of large companies their corporate tax rate will remain unchanged. These companies include:

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retirement savings account providers;

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authorised deposit-taking institutions;

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first home saver account providers;

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pooled development funds; or

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life insurance companies.

[Schedule 1, item 1, subsection 23(2) of the Rates Act]

Corporate unit trusts and public trading trusts

1.12 Corporate unit trusts and public trading trusts are both public unit trusts that are taxed as corporate tax entities and are currently taxed at the 30 per cent corporate tax rate.

1.13 For corporate unit trusts and public trading trusts that are small business entities, the corporate tax rate will be 28.5 per cent. [Schedule 1, item 3, sections 24 and 25 of the Rates Act]

Non-profit companies

1.14 Non-profit companies pay no tax on the first $416 of their taxable income. Tax is then shaded in at a rate of 55 per cent of the excess over $416 until the tax on taxable income equals the corporate tax rate. Where the taxable income exceeds the shade in limit, the full taxable income is effectively taxed at the corporate tax rate.

1.15 The shade in limit is currently $915 (reflecting the current 30 per cent corporate tax rate). As the corporate tax rate is being reduced to 28.5 per cent for small business companies, the shade in limit is reduced to $863 for non-profit companies that are small business companies. [Schedule 1, item 2, subsection 23(6) of the Rates Act]

1.16 Therefore, the rates of tax payable by a non-profit company that are small business companies will be as follows:

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first $416 of taxable income-nil;

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taxable income between $416 and $863-55 per cent; and

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taxable income above $863-28.5 per cent.

Medium credit unions

1.17 Credit unions fall into three categories for income tax purposes:

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recognised small credit unions;

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recognised medium credit unions; and

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recognised large credit unions.

1.18 A credit union is a recognised small credit union if, broadly, its notional taxable income is less than $50,000. Recognised small credit unions are exempt from tax on interest derived from loans to members. Other taxable income derived by a recognised small credit union is taxed at the corporate tax rate.

1.19 A credit union is a recognised medium credit union if, broadly, its notional taxable income is between $50,000 and $150,000. A recognised medium credit union is subject to an effective tax rate based on a sliding scale, according to its level of taxable income. The tax payable by a recognised medium credit union (before any offsets or credits) is limited to 45 per cent of the amount by which the credit union's taxable income exceeds $49,999.

1.20 A credit union is a recognised large credit union if, broadly, its notional taxable income is $150,000 or more. The taxable income derived by a recognised large credit union is taxed at the corporate tax rate.

1.21 The 45 per cent rate that applies to the taxable income of recognised medium credit unions reflects the current 30 per cent corporate tax rate. As the corporate tax rate is being reduced to 28.5 per cent for small business companies, this rate is reduced to 42.75 per cent for medium credit unions that are small business companies. [Schedule 1, item 2, subsection 23(7) of the Rates Act]

Consequential amendments

1.22 A number of consequential amendments are made to various provisions in the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 that refer to a 30 per cent rate to ensure that the appropriate rate is applied for small business companies.

Definitional amendments

1.23 The term corporate tax rate is used across the tax law to refer to the applicable tax rate that applies to companies.

1.24 The definition is amended to refer to the new tax rate of 28.5 per cent that applies to small business companies as set out in the Rates Act. The definition also refers to the standard corporate tax rate that applies to companies that do not meet the definition of a 'small business entity'. [Schedule 1, item 28, definition of 'corporate tax rate' in subsection 995-1(1) of the ITAA 1997 ()]

1.25 The standard corporate tax rate is then defined to refer to the tax rate of 30 per cent that applies to non-small business companies as set out in the Rates Act. [Schedule 1, item 29, definition of 'standard corporate tax rate' in subsection 995-1(1)of the ITAA 1997]

Maximum franking credit amendments

1.26 The maximum franking credit that can be allocated to a frankable distribution is usually set by the applicable tax rate. In the case of small business companies, the franking credit cap will be set the same as large businesses, that is, as if the small business company were being taxed at the standard corporate tax rate of 30 per cent.

1.27 While small business companies will have a higher franking credit cap than their tax rate, the normal franking credit distribution provisions will apply.

1.28 A number of consequential amendments have been made to the tax law to ensure that the maximum franking credit that can be allocated to frankable distributions will be unchanged and to address any flow-on effects. [Schedule 1, items 8 and 13 to 26]

'Corporate tax gross-up rate'

1.29 The term of corporate tax gross-up rate has been introduced to simplify the formulas applied in respect to the imputation system and to reference the 'standard corporate tax rate' to ensure that the 30 per cent rate remains unchanged. [Schedule 1, item 27, definition of 'corporate tax gross-up rate' in subsection 995-1(1)of the ITAA 1997]

Other consequential amendments

1.30 There are other smaller consequential amendments that:

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ensure that the amount of the rebate allowed under the tax exempt infrastructure borrowing concessions in certain circumstances is calculated based on the corporate tax rate that applies to the entity [Schedule 1, items 4 and 5, paragraphs 159GZZZZG(1)(d), (2)(e), (3)(e) and (4)(e) of the ITAA 1936];

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ensure that when reducing a carried forward tax offset by any unused or net exempt income that the reduction is calculated based on the corporate tax rate that applies to the entity [Schedule 1, items 9, 10 and 11, section 65-30 and subsections 65-35(3) and (3A) of the ITAA 1997];

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update examples which illustrate the operation of the company tax loss rules in certain circumstances to clarify that the company in the example is not a small business entity [Schedule 1, items 6 and 7, the examples in subsections 36-17(5) and 36-55(1) of the ITAA 1997];

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update an example which illustrates the operation of capital gains tax discount rules for shareholders in listed investment companies to clarify that the company in the example is not a small business entity [Schedule 1, item 12, the example in subsection 115-280(3) of the ITAA 1997]; and

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make minor technical changes to accommodate the amendments [Schedule 1, items 30 and 31].

Application provisions

1.31 The amendments apply for the first income year beginning on or after 1 July 2015 and for subsequent income years. [Schedule 1, item 32]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

Small business company tax cut

1.32 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.

Overview

1.33 Schedule 1 to the Bill amends the Rates Act to reduce the company tax rate from 30 per cent to 28.5 per cent for companies that are small business entities with an aggregated turnover of less than $2 million.

Human rights implications

1.34 This Schedule does not engage any of the applicable rights or freedoms as it only applies to companies and is simply a rate change.

Conclusion

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