House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Accelerated depreciation for small business entities

Schedule 1 to this Bill amends the accelerated depreciation rules for small businesses (businesses with an aggregate annual turnover of less than $2 million) by temporarily increasing the threshold under which certain depreciating assets, costs incurred in relation to depreciating assets and general small business pools can be written off.

The increased threshold of $20,000 applies from 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015 until 30 June 2017. From 1 July 2017, the threshold is $1,000.

The increased threshold is available to all small businesses (including those who previously opted out of the simplified depreciation rules).

Date of effect: This measure applies from 7.30 pm, by legal time in the Australian Capital Territory on 12 May 2015.

Proposal announced: This measure was announced by the Treasurer on 12 May 2015 as part of the 2015-16 Budget.

Financial impact: The expansion of accelerated depreciation has the following financial impact:

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 1, paragraphs 1.42 to 1.47.

Compliance cost impact:

Summary of regulation impact statement

Regulation impact on business

Impact: This proposal will deliver a reduction in compliance costs for small businesses, particularly those which are capital intensive, through simplifying their tax arrangements and the record keeping required.

By allowing small businesses to write off more assets early, the increase in the threshold will boost small businesses cash flow, particularly for new businesses, reducing their vulnerability. The measure will also encourage additional capital investment by small businesses through lowering the pre-tax rate of return required to justify investments.

Main points:

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While small businesses play a significant role in the Australian economy, they also face a unique set of operational challenges, and as a consequence typically have higher failure rates than those for larger businesses and companies.

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A significant expansion in accelerated depreciation (the new $20,000 threshold) for small businesses will improve their cash flow, improve their resilience and encourage investment.

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The tax proposals have been informed by targeted consultation with tax specialists outside government, including the Board of Taxation on an in-confidence basis.

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Legislation is required to implement the proposal. As the measure commences from 7.30 pm legal time in the Australian Capital Territory, 12 May 2015, accelerated depreciation is scheduled with the small business company tax cut to be enacted by 30 June 2015 so taxpayers can access the accelerated depreciation measure in the 2014­15 income year.

Accelerated depreciation for primary producers

Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to allow primary producers to claim an immediate deduction for capital expenditure on water facilities and fencing assets, and to deduct capital expenditure on fodder storage assets over three years. This will assist primary producers with drought preparedness and cash flow, and encourage investment in productivity enhancing assets.

Date of effect: This measure applies to assets that an entity starts to hold, or to expenditure an entity incurs, at or after 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015.

Proposal announced: This measure was announced by the Treasurer on 12 May 2015 as part of the 2015-16 Budget.

Financial impact: This measure has these revenue implications:

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 2, paragraphs 2.52 to 2.56.

Compliance cost impact: Low. Taxpayers may incur some costs transitioning to the new treatment. However, ongoing record keeping requirements will be reduced as assets are deducted within shorter timeframes. For example, expenditure on fencing assets may be immediately deducted instead of tracked over its effective life (currently up to 30 years).

Summary of regulation impact statement

Regulation impact on business

Impact: This proposal will deliver a reduction in compliance costs for primary producers. Although they will face an initial implementation cost as they become aware of the changes, this will be outweighed by a reduction in compliance costs through simplification of their tax arrangements and the record keeping required.

Main points:

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Agriculture is a significant and growing contributor to the Australian economy. But a significant part of the sector suffers from low profitability, high debt and stagnating productivity. This reduces the resilience of farmers and their ability to adequately prepare for drought and manage risk.

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Submissions to the Agricultural Competitiveness White Paper identified the need to simplify of the depreciation arrangements for primary producers.

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Accelerated depreciation for primary producers will encourage them to invest in assets, such as water facilities and fodder storage assets, so that they can be better prepared for drought.

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Depreciation arrangements will also be simplified by allowing water facilities and fencing assets to be depreciated in one year, and fodder storage assets over three years.

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The tax proposals have been informed by the consultation process of the Agricultural Competiveness White Paper, as well as targeted consultation with tax specialists outside government on an in confidence basis.