House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 3 - Increasing the small business entity turnover threshold for certain concessions

Outline of chapter

3.1 Schedule 3 to the Bill amends the A New Tax System (Goods and Services Tax) Act 1999, Customs Act 1901, Excise Act 1901, Fringe Benefits Tax Assessment Act 1986, Income Tax Assessment Act 1936, Income Tax Assessment Act 1997 and Taxation Administration Act 1953 to enable eligible entities with an aggregated turnover of $10 million or more and less than $50 million to access the following small business entity tax concessions:

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a simplified accounting method for the purposes of GST, if determined by the Commissioner;

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the ability to defer excise-equivalent customs duty to a monthly reporting cycle;

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the ability to defer excise duty to a monthly reporting cycle;

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a fringe benefits tax exemption in relation to small business car parking;

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a fringe benefits tax exemption in relation to the provision of multiple work-related portable electronic devices;

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an immediate deduction for certain prepaid expenses;

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a two year amendment period in respect of amendments to income tax assessments;

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an immediate deduction for certain start-up expenses;

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the simplified trading stock rules; and

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the ability to calculate their PAYG instalments based on GDP-adjusted notional tax.

3.2 Eligible entities will be able to access these concessions in phases.

Context of amendments

3.3 The Government is continuing to support businesses affected by the Coronavirus pandemic by simplifying regulatory obligations and expanding access to a range of small business tax concessions for eligible businesses.

3.4 Businesses can currently access most small business entity concessions if they are carrying on a business and have an aggregated turnover of less than $10 million.

3.5 This measure expands access to certain small business entity concessions by increasing the aggregated turnover threshold that is applied for the purposes of those concessions. The threshold is being increased to capture business with an aggregated turnover of less than $50 million.

3.6 Increasing the turnover threshold will reduce red-tape for around 20,000 businesses (such as reducing reporting or calculation requirements) and in some cases reduce their tax liability.

3.7 The aggregated turnover threshold was previously raised in 2017 from $2 million to $10 million for most small business entity concessions.

Summary of new law

3.8 Schedule 3 to the Bill makes amendments to enable eligible entities with an aggregated turnover of $10 million or more and less than $50 million to access certain small business entity tax concessions.

3.9 Eligible entities will be able to access the following concessions from 1 July 2020:

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an immediate deduction for certain prepaid expenses; and

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an immediate deduction for certain start-up expenses.

3.10 Eligible entities will be able to access the following concessions from 1 April 2021:

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a fringe benefits tax exemption in relation to small business car parking; and

•

a fringe benefits tax exemption in relation to the provision of multiple work-related portable electronic devices.

3.11 Eligible entities will be able to access the following concessions from 1 July 2021:

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a simplified accounting method for the purposes of GST, if determined by the Commissioner;

•

the ability to defer excise-equivalent customs duty to a monthly reporting cycle;

•

the ability to defer excise duty to a monthly reporting cycle;

•

a two year amendment period in respect of amendments to income tax assessments;

•

the simplified trading stock rules; and

•

the ability to pay PAYG instalments based on GDP-adjusted notional tax.

Comparison of key features of new law and current law

Detailed explanation of new law

3.12 The amendments made by Schedule 3 will enable businesses with an aggregated turnover of $10 million or more and less than $50 million to access certain small business tax concessions.

3.13 These amendments do not change the aggregated turnover threshold of $10 million for determining whether you are a small business entity in section 328-110 of the ITAA 1997. Rather, the amendments enable you to substitute a higher aggregated turnover threshold to work out whether you are eligible for certain small business entity concessions. This will ensure that the current aggregated turnover threshold will remain the threshold in respect of other small business entity concessions.

Amendments to the A New Tax System (Goods and Services Tax) Act 1999

Simplified accounting methods for GST

3.14 Schedule 3 makes amendments to allow eligible entities to access simplified accounting methods, as determined by the Commissioner.

3.15 Small enterprise entities, which include small business entities, can apply a simplified accounting method as determined by the Commissioner to simplify the management of their GST compliance (see Division 123 of the GST Act).

3.16 The Commissioner's power to create a simplified accounting method determination for GST purposes will be expanded to apply to businesses below the $50 million aggregated turnover threshold.

3.17 The amendments introduce a new class of entity that can be eligible for a simplified accounting method. This new class covers entities that would be small business entities if the $10 million threshold in the aggregated turnover test were $50 million. The amendments also capture the operation of section 328-110(5) of the ITAA 1997 which provides for how to work out annual turnover if you do not carry on a business for the whole income year. [Schedule 3, items 1 and 2, section 123-7(1) of the GST Act]

3.18 These amendments apply in relation to working out whether an entity is a small enterprise entity at or after the start of 1 July 2021. [Schedule 3, item 40(1)]

Amendments to the Customs Act 1901

Excise-equivalent customs duty

3.19 Schedule 3 makes amendments to allow eligible entities to defer settlement of excise-equivalent customs duty, for eligible goods, to a monthly reporting cycle.

3.20 Currently, small business entities as defined in the Customs Act 1901 can apply to the Comptroller-General of Customs to defer settlement of excise-equivalent customs duty, for eligible goods, to a monthly reporting cycle (see section 69 of the Customs Act). Other businesses are generally required to report on a weekly cycle.

3.21 The amendments create a new definition, an eligible business entity, for the purposes of expanding the businesses that are eligible to access this concession. [Schedule 3, item 3, section 4(1) of the Customs Act 1901]

3.22 Eligible business entities are entities that would be small business entities if the $10 million threshold in the aggregated turnover test were $50 million. The amendments also capture the operation of section 328-110(5) of the ITAA 1997 which provides for how to work out annual turnover if you do not carry on a business for the whole income year. [Schedule 3, items 4 and 6, section 69(1) of the Customs Act 1901]

3.23 Consequential amendments are also made as a result of the new definition of eligible business entity. [Schedule 3, items 5 and 7, section 69 of the Customs Act 1901]

3.24 These amendments will allow entities with an aggregated turnover of less than $50 million to be eligible to defer settlement of excise-equivalent customs duty to a monthly reporting cycle.

3.25 These amendments apply in relation to applications made under section 69(1) of the Customs Act 1901 on or after 1 July 2021. [Schedule 3, item 40(2)]

Amendments to the Excise Act 1901

Excise duty

3.26 Schedule 3 makes amendments to allow eligible entities to defer settlement of excise duty, for eligible goods, to a monthly reporting cycle.

3.27 Currently small business entities as defined in the Excise Act 1901 can apply to the Commissioner to defer settlement of excise duty, for eligible goods, to a monthly reporting cycle (see section 61C of the Excise Act). Businesses that are not small business entities are generally required to report on a weekly cycle.

3.28 The amendments create a new defined term, an eligible business entity, for the purposes of expanding the businesses that are eligible to access this concession. [Schedule 3, item 8, sections 4(1) of the Excise Act]

3.29 Eligible business entities are entities that would be small business entities if the $10 million threshold in the aggregated turnover test were $50 million. The amendments also capture the operation of section 328-110(5) of the ITAA 1997 which provides for how to work out annual turnover if you do not carry on a business for the whole income year. [Schedule 3, items 9 and 11, section 61C(1) of the Excise Act 1901]

3.30 Consequential amendments are also made as a result of the new defined term eligible business entity. [Schedule 3, items 10 and 12, section 61C of the Excise Act 1901]

3.31 These amendments will allow entities with an aggregated turnover of less than $50 million to be eligible to defer settlement of excise duty to a monthly reporting cycle.

3.32 These amendments apply in relation to applications made under section 61C(1) of the Excise Act 1901 on or after 1 July 2021. [Schedule 3, item 40(3)]

Amendments to the Fringe Benefits Tax Assessment Act 1986

Car parking exemption

3.33 Schedule 3 makes amendments to extend the fringe benefits tax exemption in relation to small business car parking.

3.34 Car parking benefits provided by an eligible employer to an employee where the employer is a small business entity are currently exempt from fringe benefits tax where certain conditions are met (see section 58GA of the Fringe Benefits Tax Assessment Act 1986).

3.35 The amendments introduce a new class of entities eligible for the exemption. This new class covers entities that would be small business entities if the $10 million threshold in the aggregated turnover test were $50 million. The amendments also capture the operation of section 328-110(5) of the ITAA 1997 which provides for how to work out annual turnover if you do not carry on a business for the whole income year. [Schedule 3, items 13 and 14, section 58GA(1) and 58GA(1A) of the Fringe Benefits Tax Assessment Act 1986]

3.36 These amendments will allow entities with an aggregated turnover of less than $50 million to be eligible for an exemption from fringe benefits tax on car parking benefits provided to employees.

3.37 These amendments apply to car parking benefits provided to employees from 1 April 2021. [Schedule 3, item 40(4)]

Multiple work-related portable electronic devices exemption

3.38 Schedule 3 makes amendments to extend the fringe benefits tax exemption in relation to the provision of certain work related items.

3.39 Work-related portable electronic devices provided to employees by their employers are exempt from fringe benefits tax. However the exemption does not apply to additional devices provided to employees that have substantially identical functions to devices previously provided. An exception to this is if it is a small business entity (section 58X of the Fringe Benefits Tax Assessment Act 1986).

3.40 The amendments introduce a new class of entities eligible for the exemption. This new class covers entities that would be small business entities if the $10 million threshold in the aggregated turnover test were $50 million. The amendments also capture the operation of section 328-110(5) of the ITAA 1997 which provides for how to work out annual turnover if you do not carry on a business for the whole income year. [Schedule 3, items 15 and 16, section 58X(4)(b) and section 58X(5) of the Fringe Benefits Tax Assessment Act 1986]

3.41 These amendments will allow entities with an aggregated turnover of less than $50 million to be eligible for an exemption from fringe benefits tax on additional portable electronic devices provided to employees.

3.42 These amendments apply to benefits provided to employees on or after 1 April 2021. [Schedule 3, item 40(4)]

Amendments to the Income Tax Assessment Act 1936

Immediate deduction for prepaid expenditure

3.43 Schedule 3 makes amendments to allow a wider range of entities to immediately deduct certain prepaid expenditure.

3.44 A small business entity can choose to deduct the full amount of prepaid expenditure relating to a service that will be provided across income years for a period of 12 months or shorter but that ends in the following income year (see section 82KZM of the ITAA 1936).

3.45 The amendments introduce a class of business, a medium business. These are businesses that would be a small business entity if the $10 million threshold in the aggregated turnover test were $50 million. The amendments also capture the operation of section 328-110(5) of the ITAA 1997 which provides for how to work out annual turnover if you do not carry on a business for the whole income year. [Schedule 3, items 18 and 19, section 82KZM(1) of the ITAA 1936]

3.46 A medium business will be able to also choose to deduct the full amount of prepaid expenditure relating to a service that will be provided across income years for a period of 12 months or shorter but that ends in the following income year.

3.47 These entities can also instead choose to apply section 82KZMD of the ITAA 1936 to deduct expenditure proportionally in each year of income relating to all or part of the eligible service period for the expenditure. However if an entity chooses to apply section 82KZMD, the immediate deduction under section 82KZM of the ITAA 1936 will be unavailable. [Schedule 3, items 20 and 21, sections 82KZMA(2)]

3.48 Consequential amendments have been made to the heading in section 82KZM and the note in section 82KZMD of the ITAA 1936. [Schedule 3, items 17 and 22, the heading to section 82KZM of the ITAA 1936 and the note to section 82KZMD of the ITAA 1936]

3.49 These amendments apply in relation to expenses incurred on or after 1 July 2020. [Schedule 3, item 40(5)]

Limited amendment period

3.50 Schedule 3 makes amendments to allow a wider range of entities to have a two year amendment period in relation to their income tax assessments.

3.51 Section 170 of the ITAA 1936 provides a limited period in which the Commissioner may amend a taxpayer's income tax assessment. Generally for a small business entity that period is two years.

3.52 The amendments introduce a new class of entity, a medium business entity. These are businesses that would be a small business entity if the $10 million threshold in the aggregated turnover test were $50 million. The amendments also capture the operation of section 328-110(5) of the ITAA 1997 which provides for how to work out annual turnover if you do not carry on a business for the whole income year. [Schedule 3, item 24, section 170(14) of the ITAA 1936]

3.53 Medium business entities will have a limited amendment period of two years in relation to their income tax assessments, similar to that of small business entities currently. [Schedule 3, item 23, table items 1, 2, and 3 of the table in section 170(1) of the ITAA 1936]

3.54 The Commissioner continues to be able to amend an assessment at any time if the Commissioner is of the opinion there has been fraud or evasion, or to give effect to an objection made by the taxpayer or a decision on review or appeal.

3.55 These amendments apply in relation to assessments for income years starting on or after 1 July 2021. [Schedule 3, item 40(6)]

Amendments to the Income Tax Assessment Act 1997

Immediate deduction for certain start-up expenses

3.56 Schedule 3 makes amendments to allow a wider range of entities to immediately deduct certain start-up expenditure.

3.57 A small business entity can deduct certain expenditure relating to the structure or operation of a business in the income year in which the expenditure is incurred, rather than over five years as is the case for other businesses (see section 40-880 of the ITAA 1997). Expenses that are eligible for the immediate deduction include professional expenses associated with starting a new business such as expenses associated with professional, legal and accounting advice, and Australian government agency fees, taxes or charges associated with starting a new business.

3.58 These amendments introduce a new class of eligible businesses. The new class of eligible businesses are entities that would be a small business entity if the $10 million threshold in the aggregated turnover test were $50 million. The amendments also capture the operation of section 328-110(5) of the ITAA 1997 which provides for how to work out annual turnover if you do not carry on a business for the whole income year, and make a consequential amendment. [Schedule 3, items 25, 26 and 27, sections 40-880(2A) and 40-880(2B)]

3.59 These amendments will allow entities with an aggregated turnover of less than $50 million to be able to immediately deduct certain start-up expenditure.

3.60 These amendments apply in relation to capital expenditure incurred on or after 1 July 2020. [Schedule 3, item 40(7)]

Simplified trading stock rules

3.61 Schedule 3 makes amendments to allow a wider range of entities to simplify the way they can account for changes in the value of trading stock.

3.62 Subdivision 328-E of the ITAA 1997 allows small business entities to choose not to conduct a stocktake of trading stock for an income year if the difference between the value of stock on hand at the start of the year and the reasonable estimate of the value of stock at the end of the year is not more than $5,000.

3.63 The amendments create a new class of medium business entities that will be able to make such an election. Medium business entities are entities that would be a small business if the $10 million threshold in the aggregated turnover test were $50 million. The amendments also capture the operation of section 328-110(5) of the ITAA 1997 which provides for how to work out annual turnover if you do not carry on a business for the whole income year, and make a consequential amendment. [Schedule 3, items 34, 35 and 36, section 328-285(a) and section 328-285(2)]

3.64 Consequential amendments are made to headings and phrasing as a result of the new class of medium business entity. [Schedule 3, items 30, 31, 32 and 33, sections 328-280 and 328-285 of the ITAA 1997]

3.65 These amendments will allow entities with an aggregated turnover of less than $50 million to choose a simplified way of accounting for the changes in value of trading stock.

3.66 The amendments apply in relation to income years starting on or after 1 July 2021. [Schedule 3, item 40(8) ]

Amendments to the Taxation Administration Act 1953

PAYG instalments based on GDP-adjusted notional tax

3.67 Schedule 3 makes amendments to allow a wider range of entities to calculate their quarterly PAYG instalments based on GDP-adjusted notional tax.

3.68 Small business entities (except entities that would be small business entities under section 328-110(4) of the ITAA 1997) can elect to have their PAYG instalments calculated for them by the ATO as a quarterly payer who pays on the basis of GDP-adjusted notional tax (section 45-130(1)(d) of Schedule 1 to the TAA).

3.69 The amendments will introduce a new class of eligible entity that can choose to adopt this kind of quarterly payment cycle. This new class consists of entities that would be small business if the $10 million threshold in the aggregated turnover test were $50 million. The amendments also capture the operation of section 328-110(5) of the ITAA 1997 which provides for how to work out annual turnover if you do not carry on a business for the whole income year, and make a consequential amendment. [Schedule 3, items 37 and 38, sections 45-130(1) and 45-130(2A) of Schedule 1 to the TAA]

3.70 A consequential amendment has been made as a result of the introduction of this new class of eligible entity. [Schedule 3, item 39, sections 45-130(2A) and 45-130(3A) of Schedule 1 to the TAA]

3.71 These amendments apply in relation to income years starting on or after 1 July 2021. [Schedule 3, item 40(9)]

Consequential amendments

3.72 Amendments have been made to the notes in section 328-10(1) and 328-110(1) of the ITAA 1997 to alert readers that some small business entity concessions are available to medium business entities. [Schedule 3, items 28 and 29, sections 328-10(1) and 328-110(1) of the ITAA 1997]