House of Representatives

Tax Laws Amendment (Stronger, Fairer, Simpler and Other Measures) Bill 2011

Explanatory Memorandum

(Circulated By Authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 1 - Abolish the entrepreneurs' tax offset

Outline of chapter

1.1 Schedule 1 to this Bill 2011 repeals 'Subdivision 61-J - 25% entrepreneurs' tax offset' of the Income Tax Assessment Act 1997 (ITAA 1997), abolishing the entrepreneurs' tax offset.

1.2 All the legislative references in this chapter are to the ITAA 1997 unless otherwise specified.

Context of amendments

1.3 The entrepreneurs' tax offset was introduced into the ITAA 1997 by the Tax Laws Amendment (2004 Measures No. 7) Act 2005 and applies to assessments for income years commencing on or after 1 July 2005.

1.4 The entrepreneurs' tax offset provides up to a 25 per cent tax offset on the income tax liability attributable to business income of small businesses that have an annual turnover of under $75,000. The benefit of the offset begins to phase out for small businesses with an annual turnover above $50,000 and eligibility ceases when turnover reaches $75,000. In addition, the entrepreneurs' tax offset is subject to an income test that restricts the eligibility of individuals whose income is over a threshold amount ($70,000 if they are single and $120,000 if they have a family).

1.5 The Australia's Future Tax System Review noted that removing the entrepreneurs' tax offset would reduce compliance and administration costs and provide a more equitable and neutral treatment between self-employment and employment income. The Australia's Future Tax System Review recommended (recommendation 6) the abolition of the entrepreneurs' tax offset as it is complex to administer and provides problematic incentives related to business structure.

1.6 On 8 May 2011, the Government announced as part of the small business tax reform package in the 2011-12 Budget that it would abolish the entrepreneurs' tax offset from the 2012-13 income year.

Summary of new law

1.7 This Schedule repeals the 25 per cent entrepreneurs' tax offset from the 2012-13 income year.

Comparison of key features of new law and current law

New law Current law
The entrepreneurs' tax offset is abolished from the 2012-13 income year. The entrepreneurs' tax offset provides small businesses that have an annual turnover of less than $75,000 with a tax offset of up to 25 per cent of their income tax liability in respect of their business income. An income test restricts the eligibility of individuals whose income is over a threshold amount for entrepreneurs' tax offset purposes ($70,000 if they are single and $120,000 if they have a family).

Detailed explanation of new law

1.8 This Schedule repeals the 25 per cent entrepreneurs' tax offset from the 2012-13 income year. [Schedule 1, items 1 to 3, headings under section 13-1, Subdivision 61-J]

Application and transitional provisions

1.9 The amendments made by this Schedule apply in relation to the 2012-13 income year and later income years. [Schedule 1, item 10]

Consequential amendments

1.10 Consequential amendments are made to the ITAA 1997, the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997) and the Taxation Administration Act 1953 (TAA 1953) to remove references to the entrepreneurs' tax offset. [Schedule 1, items 4 to 9, note to subsection 328-10(2), section 995-1, paragraphs 328-111(2)(c) and 328-112(3)(c) of the IT(TP)A 1997, paragraph (c) of step 1 in section 45-340 in Schedule 1 to the TAA 1953]


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