Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello MP)
The following abbreviations and acronyms are used throughout this explanatory memorandum.
|Commissioner||Commissioner of Taxation|
|GST Act||A New Tax System (Goods and Services Tax) Act 1999|
|GST||goods and services tax|
General outline and financial impact
This Bill amends the A New Tax System (Goods and Services Tax) Act 1999 to enable the Commissioner of Taxation to extend simplified goods and services tax accounting methods to more small businesses and other entities with an annual turnover of less than $2 million.
Date of effect : These amendments are to apply from 1 July 2007.
Proposal announced : This measure was announced in the Treasurer's Press Release No. 038 of 8 May 2007.
Financial impact : These amendments will have these revenue implications:
|2007 - 08||2008 - 09||2009 - 10||2010 - 11|
Compliance cost impact : There may be some minor transitional compliance costs for eligible businesses as they initially adopt the new simplified accounting methods. However, on an ongoing basis, the simplified accounting methods are expected to reduce their compliance costs.
Chapter 1 Simplified accounting methods - extending availability
1.1 This Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to assist in reducing the compliance costs of small businesses.
1.2 These amendments allow the Commissioner of Taxation (Commissioner) to determine simplified accounting methods in writing. These can be made for small businesses and other entities with an annual turnover of less than $2 million, that make a mix of taxable and GST-free supplies, or that acquire a mix of supplies that are taxable and GST-free for the suppliers (mixed inputs).
1.3 The GST law requires businesses that make mixed (taxable and GST-free) supplies or have mixed inputs to establish whether the particular supplies or acquisitions are taxable or GST-free when preparing their business activity statement. This ensures that affected businesses remit the correct amount of goods and services tax (GST) and also claim the correct amount of input tax credits.
1.4 Businesses incur compliance costs in seeking to distinguish between taxable and GST-free supplies. Similarly, they bear compliance costs in accounting for input tax credits where they have mixed inputs.
1.5 Division 123 of the GST Act allows the Commissioner to determine simplified accounting methods for retailers (ie, business entities that sell goods to people for their private use or consumption):
- that sell food; or
- that make supplies that are GST-free under the GST concession for charities.
1.6 The existing simplified accounting methods provide eligible small retailers with alternative methods for working out their GST liability. These methods remove the need to establish whether particular supplies are taxable or GST-free and whether particular acquisitions are creditable, or are not because they relate to the acquisition of supplies that are GST-free.
1.7 This Bill seeks to extend the class of entities for whom the Commissioner can determine simplified accounting methods. These amendments benefit small businesses and other entities with an annual turnover of less than $2 million that either make mixed supplies or have mixed inputs. It is envisaged that extending the availability of simplified accounting methods to more small businesses and other entities will reduce their compliance costs on an ongoing basis.
1.8 This Bill amends the GST Act to allow the Commissioner to determine simplified accounting methods for businesses and other entities with an annual turnover of less than $2 million that make mixed supplies or have mixed inputs.
|New law||Current law|
|The Commissioner can determine simplified accounting methods for businesses and other entities with an annual turnover of less than $2 million that make mixed supplies or have mixed inputs or both mixed supplies and mixed inputs. The Commissioner can continue to determine simplified accounting methods for retailers and charities.||The Commissioner can determine simplified accounting methods for retailers who sell food, or who make supplies that are GST-free under the GST concession for charities.|
1.9 This Bill is intended to reduce the GST compliance costs for small businesses by extending the availability of simplified accounting methods to businesses and other entities with an annual turnover of less than $2 million that make mixed supplies or have mixed inputs. Where a business or other entity chooses to follow a simplified accounting method that applies to them they can calculate their net amount for GST purposes based on the method. [ Schedule 1, items 5, 7, 8 and 13, paragraphs 123 - 5(1 )( a ) and ( b ), section 123 - 7, paragraph 123 - 10(1 )( aa ), subsection 123 - 15(1 )]
1.10 An important precondition is that an entity must, as part of its enterprise, make a mix of both taxable supplies and supplies that are GST-free. Alternatively, an entity will also potentially qualify for a simplified accounting method if, as part of its enterprise, it has a mix of creditable acquisitions and acquisitions that are not creditable because the acquisitions made by the entity were GST-free supplies. This requirement ensures that simplified accounting methods are only potentially available to entities that need to adjust the amount of GST remitted or input tax credits claimed because of the impact of making GST-free supplies or having acquisitions of supplies that are GST-free. Despite this, if a small enterprise entity qualifies under the above criteria, the Commissioner may choose to make a determination that applies more broadly. Such a determination, whilst applying to taxable and GST-free supplies, could also apply to input-taxed and out of scope transactions and similarly to acquisitions of such supplies. [ Schedule 1, item 6, subsection 123 - 5(3 )]
1.11 This Bill extends the existing operation of Division 123 to entities that either carry on a business or conduct an enterprise that does not constitute a business. In order to qualify, a business must be a small business entity for the year of income or alternatively an entity that does not carry on a business but meets the $2 million 'small enterprise turnover threshold' in Division 188 of the GST Act. This ensures that all GST registered entities that meet the qualifying criteria can potentially access a simplified accounting method. [ Schedule 1, items 7, 15 and 17, section 123 - 7, paragraph 188 - 10(3 )( ba ) and the definition of ' small enterprise turnover threshold' in section 195 - 1 ]
1.12 Under these amendments, the Commissioner can make determinations for qualifying small enterprise entities. The definition of 'small enterprise entity' is inserted in the Dictionary in Division 195 of the GST Act [ Schedule 1, item 16, definition of ' small enterprise entity' in section 195 - 1 ]. Under the definition both of the following qualify as small enterprise entities:
- a small business entity; and
- an entity that does not carry on a business but has an annual turnover that does not exceed $2 million as calculated under the GST turnover test in Division 188.
1.13 However, a business that only qualifies as a small business entity because its turnover as worked out at the end of the year of income (but not at the beginning of the year of income), is less than the $2 million threshold, is excluded from eligibility for a simplified accounting method. This reflects that the small business entity test has been designed to allow entities to access various income tax concessions. Accordingly, it is appropriate that businesses be able to, as an alternative, establish at the end of a year of income whether they qualified as a small business entity for income tax purposes. This recognises that businesses will not lodge their tax return until some period after the end of the income tax year. In contrast, entities need to account for GST on a real time basis and therefore need certainty about how to treat transactions for the next tax period. The 'small business entity' definition accordingly only allows the turnover of the entity to be worked out at the start of the financial year. [ Schedule 1, item 7, section 123 - 7 ]
1.14 A small enterprise entity cannot choose to apply a simplified accounting method within 12 months after revoking an earlier decision to apply a simplified accounting method. Similarly, a small enterprise entity cannot revoke a choice within 12 months of making the choice to apply the simplified accounting method. This ensures that entities do not continuously change the particular simplified accounting method that they have chosen in order to reduce their net amount. Similarly, a small enterprise entity cannot choose to apply two different simplified accounting methods concurrently. [ Schedule 1, items 8 to 10, paragraphs 123 - 10(1 )( aa ) and ( b ) and paragraphs 123 - 10(2 )( b ) and ( ba )]
1.15 Small enterprise entities that have applied a simplified accounting method available to them, can no longer apply the simplified accounting method from the start of the tax period after the entity ceases to be a small enterprise entity. Similarly, if a retailer has chosen to apply a simplified accounting method for retailers, then once it ceases to be a retailer it must cease to apply the simplified accounting method from the start of the tax period after the entity ceased to be a retailer. [ Schedule 1, items 11 and 12, paragraphs 123 - 10(4 )( a ) and ( aa )]
1.16 Small enterprise entities are those for which their annual turnover and the turnover of connected entities and affiliates is less than $2 million.
1.17 These amendments establish a framework under which the Commissioner can determine simplified accounting methods for calculating GST liabilities. The Commissioner will take into account the impact on entities and tax system integrity considerations in establishing the final scope and qualifying conditions for the simplified accounting methods.
1.18 These amendments allow the Commissioner to make determinations for particular classes of small enterprise entities that will be able to use the simplified accounting methods. It is not generally intended that the Commissioner would make specific determinations for individual entities.
Example 1.1 John carries on a small business as a widget manufacturer. He sells widgets to retailers in Australia and also exports widgets to distributors in overseas markets. As he makes mixed supplies he can apply to the Commissioner to use a simplified accounting method that applies to a class of entities in calculating his GST liability on supplies that he makes.
1.19 Small businesses that have mixed inputs and can apply a simplified accounting method will no longer need to identify the GST status of each input. Instead, they can apply a ratio to their total inputs.
Example 1.2 Camille carries on a small business, running a child care centre. She acquires basic food items GST-free in order to supply morning tea, lunch and afternoon tea to children in her care. She also acquires a range of products that are creditable acquisitions. As she has mixed acquisitions, in calculating her entitlement to input tax credits she can apply to the Commissioner to use a simplified accounting method that applies to a class of entities to which her business is a member.Camille will no longer need to identify whether each of her acquisitions is GST-free or taxable. Instead, she will apply a ratio to determine for what portion of her acquisitions she can claim an input tax credit.
1.20 These amendments apply from 1 July 2007. [ Schedule 1, item 18 ]
1.21 With the extension of Division 123 to include 'small enterprise entity', references in other tables in the GST Act and the heading and summary of operation in Division 123 that refer to retailers, have been updated to also include a reference to 'small enterprise entity'. [ Schedule 1, items 1 to 4, sections 17 - 99, 37 - 1 and 123 - 1 ]