Revised Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 13 - Regulation impact statement
The objectives of the New Business Tax System
13.1 These Bills establish the uniform capital allowance system that is a part of the Governments broad-ranging reforms which will give Australia a New Business TaxSystem. The reforms are based on the recommendations of the Review of Business Taxation, established by the Government to consider reform of Australias business tax system.
13.2 The Government established the Review of Business Taxation in August 1998 to consult on its plan to comprehensively reform the business tax system (as outlined in ANTS). The Review of Business Taxation made 280 recommendations to the Government that were designed to achieve a more simple, stable and durable business tax system.
13.3 The New Business TaxSystem 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 a sustainable revenue base so that the Government can continue to deliver services for the community.
13.4 The New Business TaxSystem also seeks to provide a basis for more robust investment decisions by:
- improving simplicity and transparency;
- reducing the cost of compliance; and
- providing fairer, more equitable outcomes.
13.5 These Bills are part of the legislative program implementing the New Business TaxSystem. Other Bills have been introduced and passed already and are summarised in Table 13.1.
|New Business Tax System (Integrity and Other Measures) Act 1999||Received Royal Assent on 10 December 1999.|
|New Business Tax System (Capital Allowances) Act 1999||Received Royal Assent on 10 December 1999.|
|New Business Tax System (Income Tax Rates) Act (No. 1) 1999||Received Royal Assent on 10 December 1999.|
|New Business Tax System (Former Subsidiary Tax Imposition) Act 1999||Received Royal Assent on 10 December 1999.|
|New Business Tax System (Capital Gains Tax) Act 1999||Received Royal Assent on 10 December 1999.|
|New Business Tax System (Income Tax Rates) Act (No. 2) 1999||Received Royal Assent on 10 December 1999.|
|New Business Tax System (Venture Capital Deficit Tax) Bill 1999||Received Royal Assent on 22 June 2000.|
|New Business Tax System (Miscellaneous) Bill 1999||Received Royal Assent on 30 June 2000.|
|New Business Tax System (Miscellaneous) Bill (No. 2) 2000||Received Royal Assent on 30 June 2000.|
|New Business Tax System (Integrity Measures) Bill 2000||Received Royal Assent on 30 June 2000.|
|New Business Tax System (Alienation of Personal Services Income) Bill 2000||Received Royal Assent on 30 June 2000.|
|New Business Tax System (Alienated Personal Services Income) Tax Imposition Bill (No. 1) 2000||Received Royal Assent on 30 June 2000.|
|New Business Tax System (Alienated Personal Services Income) Tax Imposition Bill (No. 2) 2000||Received Royal Assent on 30 June 2000.|
|New Business Tax System (Simplified Tax System) Bill 2000||Introduced into the Parliament on 7 December 2000.|
13.6 A number of exposure drafts have recently been released. These include:
- the New Business Tax System (Entity Taxation) Bill 2000 - Exposure Draft (released in October 2000);
- the New Business Tax System (Simplified Tax System) Bill 2000 - Exposure Draft (released in October 2000);
- the New Business Tax System (Consolidation) Bill 2000 - Exposure Draft (released in December 2000); and
- the New Business Tax System (Thin Capitalisation and Other Measures) Bill 2001 - Exposure Draft (released in February 2001).
This Bill was released as an exposure draft in December 2000 and in May 2001; these exposure drafts were titled the New Business Tax System (Capital Allowances) Bill 2000 - Exposure Draft and the New Business Tax System (Capital Allowances) Bill 2001 - Exposure Draft.
The objectives of measures in this Bill
13.7 The New Business Tax System will enhance Australias competitiveness by removing many of the direct or indirect impediments to desirable investment.
13.8 The uniform capital allowance system based on a common set of principles will offer significant simplification benefits. The existing law contains over 37 separate capital allowances regimes that are complex, inconsistent and involve significant replication. The collapse of the majority of these separate regimes into a single comprehensive regime has the objectives of providing:
- consistent taxation treatment of depreciating assets by reference to the effective life of these assets;
- a framework under which blackhole expenditure on depreciating assets can be recognised; and
- more neutral tax treatment for some other specific capital expenditures that should improve investment and economic efficiency.
13.9 A new measure included in the Capital Allowances Bill has the objective of including datacasting transmitter licences purchased by entities as depreciating assets under the uniform capital allowance system. This measure was announced on 24 January 2001.
13.10 The uniform capital allowance system arises from recommendations of the Review of Business Taxation. Those recommendations were the subject of extensive consultation. The implementation options for those measures can be found in the Review of Business Taxations A Platform for Consultation and A Tax System Redesigned . Table 130 shows where the measures (or the principles underlying them) are discussed in these publications.
|Features of the uniform capital allowance system||A Platform for Consultation||A Tax System Redesigned|
|Many of the capital allowance regimes to be collapsed into a single comprehensive regime that generates deductions based on the effective life of assets.||Chapter 1, pp. 90-92. Chapter 1, pp. 79-83.||Recommendation 8.1, pp. 305-308. Recommendation 8.2, pp. 308-309.|
|The taxation treatment of depreciating assets to be consistent across the range of depreciating assets and where not consistent, to have a transparent basis for that differential treatment.|
|That the taxpayer who incurs the loss in value of the asset, not necessarily the legal owner of the asset be entitled to deduct their cost of depreciating assets.||Chapter 1, pp. 83-85.||Recommendation 8.3, pp. 309.|
|As a general principle the cost of an asset to the person who holds it includes all their relevant capital expenses of holding that asset.||Chapter 1, pp. 85-87.||Recommendation 8.4, pp. 309-313.|
|Taxpayers continue to be provided the option of using the Commissioners effective life schedule; or self-assessing the effective life of their assets. The Commissioner to institute an ongoing revision of the effective life schedule and a review of the guidelines for self-assessment of effective life.||Chapter 1, pp. 90-92.||Recommendation, 8.5, pp. 311-313.|
|Taxpayers to be permitted to recalculate the effective life of assets, either up or down, when there is a change in the circumstances surrounding the use of the asset.||Chapter 1, pp. 91-92.||Recommendation 8.6, pp. 313.|
|Taxpayers to be given the option of writing off depreciating assets on the basis of prime cost or diminishing value.||Chapter 1, pp. 97-98.||Recommendation 8.8, pp. 314-315.|
|When depreciating assets are disposed of, a balancing adjustment will occur based on any difference between the actual value of the asset and its adjustable value.||Chapter 1, pp. 98-100.||Recommendation 8.11, pp. 318-320.|
|Project development costs to be eligible for depreciation through pooling arrangements, to be pooled only where expenditures do not form part of the tax value of other assets and if pooled, to be written-off on a diminishing value basis at a rate determined by the effective life of the project.||Chapter 1, pp. 100-102.||Recommendation 8.9, pp. 315-316.|
|Some blackhole expenditure including the costs of establishing an entity and all forms of capital raising expenses to be accorded statutory write-off over a period of 5 years.||Chapter 1, pp. 100-102.||Recommendation 4.14, pp. 187-190.|
13.11 The potential compliance, administrative and economic impacts of most of the measures in these Bills have been carefully considered, both by the Review of Business Taxation and by the business sector. The Review of Business Taxation focused on the economy as a whole in assessing the impacts of its recommendations (including those relating to the measures in these Bills) and concluded that there would be net gains to business, government and the community generally from business tax reform.
Impact group identification
13.12 The measures in these Bills specifically impact on those taxpayers identified in Table 13.3.
|Many of the capital allowance provisions to be collapsed into a single comprehensive regime that generates deductions based on the effective life of assets.||Approximately 10 milliontaxpayers that currently benefit from one of the specific provisions in the income tax law that allows them to claim depreciation deductions.|
|Tax treatment of depreciating assets be consistent across the range of depreciating assets.||Taxpayers who use any of the amortisation regimes. Currently, there are over 37 such regimes in the income tax law.|
|That the taxpayer who incurs the loss in value of the asset, not necessarily the legal owner of the asset, be entitled to deduct expenditure on depreciating assets.||Economic owners who suffer a loss in value of the wasting asset, including:
|That as a general principle the cost of an asset to the person who holds it includes all relevant expenses of holding that asset.||The 10 million taxpayers who hold depreciating assets. Exceptions include primary producer provisions, tax exempt assets entering the tax net and buildings and structures.|
|Taxpayers have the option of using the Commissioners assessment of effective life or self-assessing the effective life of their assets.||The 10 million taxpayers who hold depreciating assets.|
|Taxpayers have the option of deducting expenditure on depreciating assets on the basis of prime cost or diminishing value.||The 10 million taxpayers who hold depreciating assets.|
|Where depreciating assets are disposed of the income recognition for the balancing adjustment that arises.||The 10 million taxpayers who hold depreciating assets.|
|That project development costs be eligible for depreciation through pooling arrangements, be pooled only where expenditures do not form part of the tax value of other assets and if pooled, be written-off on a diminishing value basis at a rate determined by the effective life of the project.||Taxpayers who incur certain costs as part of a project. Taxpayers engaged in extractive industries will typically have such costs. This is likely to affect approximately 1,000 taxpayers.|
|That some blackhole expenditure including the costs of establishing an entity and all forms of capital raising expenses be accorded statutory write-off over a period of 5 years.||Taxpayers who establish an entity and/or incur expenditure such as business establishment costs, business restructuring costs, equity raising costs and takeover defence costs.|
Analysis of costs / benefits
13.13 One of the key objectives of the Review of Business Taxation is to reduce the cost of compliance by business taxpayers.
13.14 The changes under the uniform capital allowance system are expected to affect approximately 170,000 business entities of all types. This number does not include those entities that may be eligible for the STS for small business.
13.15 Because the uniform capital allowance system is based on interdependent topics, the compliance costs of the introduction of this Bill have been considered collectively. The compliance costs for businesses affected by the uniform capital allowance system are expected to be reduced due to:
- a uniform treatment of depreciation for capital items rather than the current taxation treatments. This will lead to a reduction in record keeping and administration expenses; and
- recurrent savings over the life of the system relative to the previous system due to simplification.
13.16 However, these compliance cost savings may be offset initially by:
- training and education costs associated with taxpayers and agents understanding of the new legislation; and
- expenses associated with updating record keeping systems.
13.17 These transitional and ongoing compliance costs are discussed in more detail in paragraphs 130 to 13.23.
13.18 The cost of compliance impacts for the entire Review of Business Taxation reforms are outlined in pages 31-34 of A Tax System Redesigned .
Capital allowance rewrite - effective life to stay
13.19 The effective life provisions will not have a compliance cost impact for the majority of taxpayers, as the effective life concepts are used in the existing legislation including:
- the same choice between the Commissioners effective life and your own calculation of effective life of an asset;
- similar methods for working out the effective life of an asset; and
- same choice to work out a new effective life of an asset.
13.20 This measure will provide more consistency across the range of different types of depreciating assets. Generally, there are expected to be significant compliance cost savings from the rationalisation of rules and treatments of depreciating assets. In particular this will ensure reduced compliance costs for taxpayers who are using more than one of the existing amortisation regimes. These taxpayers will benefit from dealing with the one system instead of different systems for different assets.
13.21 For example, a large business with a number of assets will need knowledge of a number of different amortisation regimes. There are different amortisation regimes for a wide variety of depreciating assets including plant, buildings and forestry roads. A business having assets within all of these classes would mean that the business owner, staff and/or a tax agent would be required to perform separate calculations, using different depreciation rules and keep separate records for each regime. This difference could be expected to add significant time and must be done annually, each time a tax return is prepared. In addition, the depreciation schedule and other records relating to depreciation must be kept for 5 years.
Entitlement to write-off
13.22 The measure where an entitlement to write-off is given to the taxpayer who incurs the loss in value of the asset, should reduce compliance costs once taxpayers become familiar with the measure. There should be fewer compliance costs because the doubt that currently exists with the legal ownership test in the current law will be removed. The change will ensure that each appropriate eligible person will be entitled to depreciation with respect to holding of an asset or an interest in an asset.
Cost of asset to include all relevant costs
13.23 The cost of assets are to include all relevant costs of acquiring and installing the asset. These costs should currently be accounted for and therefore should not affect compliance costs.
Option of methods
13.24 The option of writing off depreciating assets on the basis of prime cost or diminishing value may cause a small compliance cost increase for some taxpayers in relation to assets for which no option presently applies. This increase can be attributed to the extra cost in taxpayers having to work out the new formulas, the removal of the general rates for some types of depreciating assets and that for a number of assets taxpayers have to make a decision between methods.
13.25 Most of the measures in this Bill are not expected to impose ongoing administration costs. There will be a small initial administration cost involved in updating systems, return forms and other ATO publications and in providing education.
13.26 A comprehensive assessment of the revenue impact of all measures recommended by the Review of Business Taxation is provided in the Overview and Section 24 of A Tax System Redesigned . The revenue impact provided in Section 24 was based on implementing all recommendations in A Tax System Redesigned . However, some recommendations have already been adopted, for example the removal of accelerated depreciation, while other recommendations in relation to capital allowances have not been included in Division 40.
13.27 The revenue impact of these particular changes adopted in this Bill cannot be accurately ascertained or separated from the collated revenue impacts in Section 24 of A Tax System Redesigned .
13.28 The New Business TaxSystem 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. The economic benefits of these measures are explained in more detail in the publications of the Review of Business Taxation, particularly A Platform for Consultation and A Tax System Redesigned .
Other issues - consultation
13.29 The consultation process began with the release of ANTS in August 1998. The Government established the Review of Business Taxation in that month. Since then, the Review of Business Taxation has published 4 documents about business tax reform; in particular A Platform for Consultation in which it canvassed options, discussed issues and sought public input.
13.30 Throughout that period, the Review of Business Taxation held numerous public seminars and focus group meetings with key stakeholders in the tax system. It received and analysed 376 submissions from the public about reform options. Further details are contained in paragraphs 11 to 16 of the Overview to A Tax System Redesigned .
13.31 In analysing options, the published documents frequently referred to, and were guided by, views expressed during the consultation process.
13.32 After the production of a draft version of the Capital Allowances Bill, several capital allowance workshops were held with key stakeholders in the tax system, to obtain their thoughts on the draft Bill produced for these measures. Many comments were received through this process, and were taken into account before the release of the Bill for public consultation.
13.33 After the release of the exposure draft in December 2000 on Capital Allowances, 19 submissions were received from stakeholders. These submissions have been considered prior to the release of these Bills.
13.34 Through this process a number of concerns have been raised and in some cases changes were made to the draft legislation, some of which are described in paragraphs 130 to 13.38.
13.35 Removal of an item in the hold table about depreciating assets connected with mining capital expenditure and transport capital expenditure is one such change. This was removed as it was considered that it did not work structurally and that it would be better dealt with in the project pool provisions. The effect of that item has been placed into the project pool mechanism and called an asset contribution amount.
13.36 A concern was also raised that a mandatory recalculation of project life would result in high compliance costs. This requirement has been removed from the legislation.
13.37 Further, a change was made to the draft to ensure a deduction is allowable when a project is abandoned, sold or otherwise disposed of. This change arose due to the consultation process.
13.38 Other changes made as a result of the consultations include:
- the removal of complex rules about partially completed assets;
- guidance included in this explanatory memorandum on the identification of a depreciating asset; and
- the relationship with the mining provisions under the existing law and the inclusion of finding tables.
13.39 The measures in these Bills should be adopted to support a more efficient, innovative and internationally competitive Australian business sector, to reduce compliance costs and to establish a simpler and more structurally sound business tax system.