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House of Representatives

Tax Laws Amendment (Small Business Measures No. 2) Bill 2015

Explanatory Memorandum

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

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation Definition
ACCI Australian Chamber of Commerce and Industry
ACWP Agricultural Competitiveness White Paper
ADIA Australian Dental Industry Association
AEST Australian Eastern Standard Time
ATO Australian Taxation Office
Commissioner Commissioner of Taxation
GDP Gross domestic product

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:

2014-15 2015-16 2016-17 2017-18 2018-19
- -$250m -$800m -$850m $150m

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:

Average Annual Compliance Costs (from business as usual)
Sector/Cost categories Business Not-for profit Individuals Total by cost Category
Administrative Costs -$6.8m - - -$6.8m
Substantive compliance costs $2.6m - - $2.6m
Delay costs - - - -
Total by Sector -$4.2m $0 $0 -$4.2m

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:

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

2014-15 2015-16 2016-17 2017-18 2018-19
0 -$2m -$30m -$45m -$65m

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:

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

Chapter 1 - Accelerated depreciation for small business entities

Outline of chapter

1.1 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.

1.2 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.

1.3 The increased threshold is available to small business entities (including those who previously opted out of the accelerated depreciation rules).

1.4 All legislative references in this chapter are to the Income Tax Assessment Act 1997, unless otherwise stated.

Context of amendments

1.5 In the 2015-16 Budget, the Government announced a number of measures as part of a jobs and small business package, including expanding accelerated depreciation for small businesses. Increasing the immediate deduction for capital expenditures improves small businesses' cash flow. Small businesses tend to be more vulnerable to cash flow problems than larger businesses because their profitability tends to be more volatile and they have lower levels of retained earnings. The impact is expected to be bigger for new small businesses, as large capital expenditures often occur early in a business' life. The measure will also encourage additional capital investment by small businesses through lowering the pre-tax rate of return required to justify new investments.

Summary of new law

1.6 Schedule 1 to this Bill amends the accelerated depreciation rules for eligible 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 from $1,000 to $20,000.

1.7 The increased threshold 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.

Comparison of key features of new law and current law

New law Current law
Deductions for depreciating assets
Small business entities can claim an immediate deduction for depreciating assets that cost less than $20,000, provided the asset is first acquired at or after 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015, and first used or installed ready for use on or before 30 June 2017. Depreciating assets that do not meet these timing requirements continue to be subject to the $1,000 threshold.

Small business entities can claim an immediate deduction for depreciating assets that cost less than $1,000 if the asset is first used or installed ready for use on or after 1 July 2017.

Small business entities can claim an immediate deduction for depreciating assets that cost less than $1,000 in the income year the asset is first used or installed ready for use.
Deductions for amounts included in the second element of the cost of depreciating assets
Small business entities can claim a deduction for an amount included in the second element of the cost of depreciating assets that are first used or installed ready for use in a previous income year. The total amount of the cost must be less than $20,000 and the cost must be incurred at or after 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015, and on or before 30 June 2017. Costs that are incurred outside of these times continue to be subject to the $1,000 threshold.

Small business entities can claim a deduction for an amount included in the second element of the cost of depreciating assets that are first used or installed ready for use in a previous income year, where the amount is less than $1,000, and the cost is incurred on or after 1 July 2017.

Small business entities can claim a deduction for an amount included in the second element of the cost of depreciating assets that are first used or installed ready for use in a previous income year. The total amount of the cost must be less than $1,000.
Deductions for low value pools
From 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015, assets that cost $20,000 or more, and costs of $20,000 or more relating to depreciating assets can be allocated to a small business entity's general small business pool and deducted at a specified rate for the depletion of the pool.

Assets and costs allocated to a general small business pool are deducted at a rate of 15 per cent in the year they are allocated, and a rate of 30 per cent in subsequent income years.

If the balance of a small business entity's general small business pool is less than $20,000 at the end of an income year, the small business entity can claim a deduction for the entire balance of the pool. The income year must end on or after 12 May 2015, and on or before 30 June 2017.

If the balance of a small business entity's general small business pool is less than $1,000 at the end of an income year that ends after 30 June 2017, the small business entity can claim a deduction for the entire balance of the pool.

Small business entities can allocate depreciating assets that cost $1,000 or more, and costs of $1,000 or more relating to depreciating assets, to their general small business pool and claim a deduction at a specified rate for the depletion of the pool.

Assets and costs allocated to a general small business pool are deducted at a rate of 15 per cent in the year they are allocated, and a rate of 30 per cent in subsequent income years.

If the balance of a small business entity's general small business pool is less than $1,000 at the end of an income year, the small business entity can claim a deduction for the entire balance of the pool.

Five year 'lock out' rule
The increased threshold that applies between 12 May 2015 and 30 June 2017 applies to all small business entities, including those subject to the 5 year lock out rule in that period because the small business previously opted out of the small business entity capital allowance provisions.

For the purposes of applying the lock out rule to an income year after 30 June 2017, only the choice made in the in the last income year ending on or before 30 June 2017 is relevant.

A small business entity that elects to apply the small business capital allowance provisions in an income year, and then does not choose to apply the provisions in a later income year in which they satisfy the conditions to make that choice (that is, the entity 'opted out'), the small business entity is not able to apply the small business entity capital allowance provisions until five years after they opted out.

Detailed explanation of new law

1.8 The $1,000 threshold for the cost of depreciating assets, costs incurred in relation to depreciating assets, and the low pool value deduction under the small business entity capital allowance provisions is temporarily increased to $20,000.

1.9 This increase applies from 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015, and ceases on 30 June 2017. The threshold returns to $1,000 from 1 July 2017.

Deductions for depreciating assets

1.10 Under the existing arrangements, a small business entity (businesses with an aggregate annual turnover of less than $2 million) may elect to use the capital allowance rules to deduct or 'write off' the taxable purpose proportion of the cost of an asset acquired for less than $1,000.

1.11 The 'taxable purpose proportion' of a depreciating asset is defined in subsection 328-205(3) and in general terms represents the proportion of an asset's use in an income year that is for the purposes of producing assessable income. The deduction for assets that cost less than $1,000 is claimed in the income year in which the asset was first used or installed ready for use.

1.12 The amendments temporarily increase the threshold for writing off depreciating assets from $1,000 to $20,000. The taxable purpose proportion of an asset with a cost of less than $20,000 can be deducted for the income year in which the asset was first used or installed ready for use. [Schedule 1, item 9, subsection 328-180(4) of the Income Tax (Transitional Provisions) Act 1997]

1.13 As a result of the increased threshold for writing off assets, depreciating assets that cost $20,000 or more are allocated to a small business entity's general small business pool. The taxable purpose proportion of the cost of such an asset is deducted at a rate of 15 per cent in the income year in which it is first used or installed ready for use, with the remainder deducted in subsequent income years under the pooling rules at an ongoing rate of 30 per cent.

1.14 The increased threshold applies only to assets that were first acquired at or after 7.30 pm, legal time in the Australian Capital Territory on 12 May 2015, and first used or installed ready for use on or before 30 June 2017. Assets that do not satisfy these timing requirements continue to be subject to the $1,000 threshold. [Schedule 1, item 9, paragraphs°328 180(4)(a) and (b) of the Income Tax (Transitional Provisions) Act°1997]

1.15 The requirement that an asset be 'first acquired' at a particular time is not a feature of Subdivision 328-D and is an additional requirement for the increased threshold to apply. This additional requirement limits access to the increased threshold to a small business entity's 'new' assets. Requiring a depreciating asset to have been 'first' acquired by the small business entity ensures that assets cannot satisfy the acquisition requirement if they were previously acquired at an earlier time, temporarily disposed of, and then reacquired at or after the 7.30 pm start time.

1.16 Depreciating assets that are first acquired prior to the 7.30 pm start time continue to be subject to the existing threshold, irrespective of when they are first used or installed ready for use. The existing threshold also applies to depreciating assets that are first acquired from the 7.30 pm start time but were not first used or installed ready for use on or before 30 June 2017.

Example 1.1 Patrick's Plumbing Pty Ltd (Patrick's Plumbing) is a small business entity and satisfies the conditions to make the choice to apply the small business capital allowance provisions in the income year that runs from 1 July 2015 to 30 June 2016.Patrick's Plumbing purchases a truck on 15 July 2015 for $19,000. The truck is used 100 per cent for business purposes and therefore has a taxable purpose proportion of 100 per cent.Patrick's Plumbing chooses to apply the small business capital allowance provisions and writes off the asset by claiming a $19,000 deduction for the truck in its tax return for the 2015­16 income year.

Example 1.2 Daryl's Electrical Pty Ltd (Daryl's Electrical) is a small business entity and satisfies the conditions to make the choice to apply the small business capital allowance provisions in the income year that runs from 1 July 2015 to 30 June 2016.Daryl's Electrical acquires a ute for $40,000 on 28 July 2015. Daryl's Electrical estimates that the ute has a taxable purpose proportion of 40 per cent for the 2015-16 income year. As the ute cost more than $20,000, Daryl's Electrical is unable to immediately deduct the cost of the ute and the ute is instead added to Daryl's Electrical's general small business pool.Daryl's Electrical's general small business pool has an opening balance of $10,000 on 1 July 2015 from assets added to the pool in previous income years. Assuming the ute was the only asset allocated to Daryl's Electrical's general small business pool in the 2015­16 income year, the deduction that Daryl's Electrical can claim in the 2015-16 income year under the pooling rules is 15 per cent of the taxable purpose proportion of the ute, and 30 per cent of the opening balance of the pool. As the taxable purpose of the proportion of the ute is $16,000 (being 40 per cent of $40,000), the deduction allowable is $2,400 (being 15 per cent of $16,000) for the ute and $3,000 for the opening balance of the general small business pool.

1.17 Consistent with the objective of the increased threshold applying to newly acquired assets, it is not intended that assets acquired under artificial or contrived arrangements have access to the increased threshold, or indeed to the existing arrangements. An example of an arrangement of this kind would be where a number of related small business entities that earned income from similar income sources sold their assets to one another in order to satisfy the 'first acquired' requirement and write off the full value of those assets under the increased threshold.

1.18 While a specific provision has not been included under these amendments in relation to artificial or contrived arrangements, the general anti avoidance provisions are intended to be applied to arrangements of that kind. In the event of evidence that small business entities systematically engaged in artificial or contrived arrangements designed to take advantage of the increased threshold and the general anti-avoidance provisions became too administratively difficult to apply, retrospective amendments to explicitly prohibit such behaviour would be considered to ensure that the integrity of the small business capital allowance provisions is maintained.

Deductions for amounts included in the second element of the cost of depreciating assets

1.19 Under the existing arrangements, a small business entity can also deduct an amount included in the second element of a depreciating asset's cost (for example, an amount spent on improving or transporting a depreciating asset), provided the amount is under $1,000, the amount is the first such amount to be deducted in respect of the asset, and the asset was written off in a previous income year.

1.20 Consistent with the changes to the threshold for writing off depreciating assets, the amendments temporarily increase the threshold for writing off amounts included in the second element of a depreciating asset's cost from $1,000 to $20,000. [Schedule 1, item 9, subsection 328-180(5) of the Income Tax (Transitional Provisions) Act 1997]

1.21 As a result of these amendments, if a small business entity incurs a cost of $20,000 or more that is included in the second element of a depreciating asset's cost, and the depreciating asset has been written off in a previous income year, the asset in relation to which the cost was incurred is treated as having a value equal to the amount that is included in the second element of its cost. The asset is then allocated to the small business entity's general small business pool, deducted at a rate of 15 per cent in the income year in which the amount was incurred, and then deducted at a rate of 30 per cent in subsequent income years as part of the general small business pool.

1.22 The increased threshold applies only to costs that are included in the second element of the depreciating assets cost during the period commencing at 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015 and ending on 30 June 2017. Costs that are in incurred outside of this period continue to be subject to the $1,000 threshold. [Schedule 1, item 9, paragraphs 328-180(5)(a) and (b) of the Income Tax (Transitional Provisions) Act 1997]

Example 1.3 Taylor's Tailoring Pty Ltd (Taylor's Tailoring) is a small business entity and satisfies the conditions to make the choice to apply the small business capital allowance provisions in the 2014-15 and 2015­16 income years. Taylor's Tailoring's income year runs from 1 July to 30 June.On 1 June 2015, Taylor's Tailoring purchases an industrial sewing machine for $5,000 for use in its tailoring business. The taxable purpose proportion of the sewing machine is 100 per cent.Taylor's Tailoring chooses to apply the small business capital allowance provisions and writes off the asset by claiming a $5,000 deduction in its income tax return in the 2014-15 income year.On 30 November 2015, an overlocking function is added to the machine to improve its functionality and for use in the tailoring business. The cost of this improvement is $2,000.As the sewing machine was written off in the 2014-15 income year and the amount of the improvement is less than $20,000, Taylor's Tailoring claims a $2,000 deduction in its income tax return for the 2015-16 income year.

Deductions for low pool values

1.23 Under the existing arrangements, a small business entity can also deduct the balance of its general small business pool at the end of an income year if the balance of the pool at the end of the year is less than $1,000. The balance of the pool is determined prior to calculating any deductions in respect of the pool.

1.24 The amendments temporarily increase the 'low pool value' threshold to $20,000, meaning that a small business entity can deduct the entire balance of its general small business pool if the balance of the pool at the end of an income year is less than $20,000. [Schedule 1, item 9, subsection 328-180(6) of the Income Tax (Transitional Provisions) Act 1997]

1.25 Because the rules for writing off low pool values apply at the end of an income year, the increased threshold for low pool values applies to income years that end during the period commencing at 7.30 pm legal time in the Australian Capital Territory on 12 May 2015 and ending on 30 June 2017. [Schedule 1, item 9, subsection 328-180(6) of the Income Tax (Transitional Provisions) Act 1997]

1.26 For small business entities that have accounting periods that align with the financial year (that is, accounting periods that commence on 1 July and end on 30 June), the amendments mean that general small business pools that have a balance of less than $20,000 on the final day of the 2014-15, 2015-16, and 2016-17 income years can be written off. Although the majority of the 2014-15 financial year does not fall within the period covered by the amendments, a general small business pool with a balance of less than $20,000 can still be written off at the end of a standard 2014-15 income year because that year ends during the period covered by the amendments.

Example 1.4 Levi's Pet Washing Pty Ltd (Levi's Pet Washing) is a small business entity and satisfies the conditions to make the choice to apply the small business capital allowance provisions in the 2013-14 and 2014-15 income years. Levi's Pet Washing's income year runs from 1 July to 30 June.In the 2013 14 income year, Levi's Pet Washing purchased a fitted out van for the mobile pet washing business for $20,000. The van was purchased 100 per cent for a taxable purpose. The business did not have any other assets in its general small business poolIn its 2013 14 income tax return, as the cost of the van was over the $1,000 threshold that applied for the income year, the business claimed a deduction for 15 per cent of the cost ($3,000), with the remaining cost ($17,000) being deductible in later income years under the pooling rules.The business did not make any further purchases during the 2014­15 income year and the balance of the pool at the end of the 2014-15 income year remained at $17,000.In its 2014-15 income tax return, Levi's Pet Washing claimed a deduction of $17,000 for the balance of the general small business pool, as the balance of the pool at the end of the year is below the $20,000 threshold that applies for that year.

Deductions for low pool values in substituted accounting periods

1.27 For a small business entity that has a substituted accounting period (that is, an income year that does not commence on 1 July and end on 30 June), the final day of the period covered by the amendments will not be the final day of one of its accounting periods. This means that in the final year in which the small business entity can write off assets under the increased thresholds, the small business entity's general small business pool will be subject to the $1,000 threshold rather than the $20,000 threshold.

1.28 If a small business entity has a late balancing substituted accounting period, for example, 1 October to 30 September, the part of its 2016­17 income year to 30 June 2017 is covered by the amendments. However, because its 2016-17 income year ends after 30 June 2017, the small business entity will not be able to access the $20,000 low pool value threshold for that income year.

1.29 Alternatively, if a small business entity has an early balancing substituted accounting period, for example, 1 April to 31 March, its entire 2016­17 income year and the first 3 months of its 2017-18 income year will be covered by the amendments. The small business entity will be able to access the $20,000 threshold in relation to its general small business pool for the 2016-17 income year, but not for the 2017-18 income year (because that income year ends after 30 June 2017).

Five year 'lock out' rule

1.30 Under the existing arrangements, a small business entity that elects to apply the small business capital allowance provisions in an income year, and then does not choose to apply the provisions for a later income year in which they satisfy the conditions to make this choice (that is, the entity 'opted out'), is not able to apply the small business capital allowance provisions for a period of five income years, commencing from the first later year for which the entity could have made the choice to apply the provisions. This rule is contained in subsection 328-175(10), and is commonly referred to as the 'lock out' rule.

1.31 The amendments alter the way the lock out rule applies in particular income years.

1.32 Small business entities are not required to apply the lock out rule to income years that end on or after 12 May 2015 but on or before 30 June 2017. These income years are referred to as 'increased access years'. [Schedule 1, item 9, subsections 328-180(1) and (2) of the Income Tax (Transitional Provisions) Act 1997]

1.33 For small business entities that have accounting periods that align with the financial year (that is, accounting periods that commence on 1 July and end on 30 June), the increased access years will be the 2014­15, 2015-16 and 2016-17 income years. During these income years, small business entities can opt back into applying the small business capital allowance provisions to access the higher threshold.

1.34 The lock out rule begins to apply again from the first income year that ends after 30 June 2017. However, in determining whether the lock out rule applies from that point, the income years preceding the increased access years are disregarded, as are all of the increased access years except for the last of those years. [Schedule 1, item 9, subsections°328­180(1) and (3) of the Income Tax (Transitional Provisions) Act 1997]

1.35 For small business entities that have accounting periods that align with the financial year, this will mean that although the lock out rule applies from the 2017-18 income year, small business entities are only required to look as far back as the 2016-17 year in determining whether the lock out rule applies.

1.36 If for some reason a small business entity opted out of the small business capital allowance provisions in the 2016-17 income year (being the last of the increased access years), the small business entity would be locked out from the small business capital allowance provisions for at least five years. However, the lock out rule would not apply if the small business entity had instead opted out in the 2015-16 income year, or an earlier income year, but then chose to apply the small business capital allowance provision in the 2016-17 income year.

Example 1.5 Zoe's Café Pty Ltd (Zoe's Café) is a small business entity and satisfies the conditions to make the choice to apply the small business capital allowance provisions in the 2015-16, 2016-17 and 2017-18 income years. The income year for Zoe's Café runs from 1 July to 30 June.On 20 May 2015, Zoe's Café purchases a new coffee machine for $12,000. The business does well and due to demand, requires a second coffee machine, which is purchased on 15 December 2015 for $13,000.Zoe's Café elects to apply the small business capital allowance provisions and claims a $12,000 deduction in the 2014-15 income year for the first coffee machine, and a $13,000 deduction in the 2015-16 income year for the second coffee machine. Both coffee machines have a taxable purpose proportion of 100 per cent.In the 2016-17 income year, Zoe's Café purchases another depreciating asset that costs more than $20,000. Zoe's Café elects not to apply the small business capital allowance provisions because it is able to claim a better deduction for the asset under the uniform capital allowance rules.In determining whether Zoe's Café is able to apply the small business capital allowance provisions in the 2017-18 income year, only the election in the 2016-17 income year is relevant.As Zoe's Café did not choose to apply the small business capital allowance provisions in the 2016-17 income year, Zoe's Café is locked out from the 2017-18 income year from applying the small business capital allowance provisions in this year. Assuming Zoe's Café was otherwise eligible to apply the small business capital allowance provisions in its 2017-18 year, Zoe's Café can only begin to apply the small business capital allowance rules again in the 2022-23 income year.

Five year lock out rule for substituted accounting periods

1.37 For a small business entity that has a substituted accounting period (that is, an income year that does not commence on 1 July and end on 30 June), the final day of the period covered by the amendments (being 30 June 2017) will not be the final day of an income year. This means that the increased access years of the small business entity will not necessarily be the 2014-15, 2015-16, and 2016-17 income years.

1.38 For a small business entity that has a late balancing substituted accounting period which ends after 30 June, the 2016-17 income year will not be an increased access year. The small business entity's 2014-15 and 2015-16 income years will be increased access years, and in determining whether the lock out rule applies from the 2016-17 income year, the 2014­15 income year and earlier income years are disregarded. Because the 2015-16 income year is the last of the small business entity's increased access years, that year will continue to be relevant for determining whether the small business entity is subject to the lock out rule for the 2016-17 income year, and later income years. If for some reason the small business entity opted out of the small business capital allowance provisions in its 2015-16 income year, the small business entity will be locked out from the provisions for at least five income years.

Example 1.6 Josh's Jukeboxes Pty Ltd (Josh's Jukeboxes) is a small business entity that has a late balancing substituted accounting period which ends on 31 August. Josh's Jukeboxes increased access years are the 2014-15 and 2015-16 income years because those years both end during the period that goes from 12 May 2015 to 30 June 2017. Josh's Jukeboxes' 2016-17 income year is not an increased access year because it ends after 30 June 2017.Josh's Jukeboxes did not apply the small business capital allowance provisions in its 2013-14 income year. Despite this, Josh's Jukeboxes can apply the small business capital allowance provisions in its increased access years (being its 2014-15 and 2015-16 income years).In determining whether Josh's Jukeboxes is able to apply the small business capital allowance provisions in its 2016-17 income year, only the election in the 2015-16 income year is relevant. If Josh's Jukeboxes chose not apply the small business capital allowance provisions in its 2015-16 income year, it will be locked out from applying the rule for at least five years, commencing from its 2016-17 income year.

1.39 Alternatively, for a small business entity that has an early balancing substituted accounting period that ends before 12 May, the 2014-15 income year will not be an increased access year. The small business entity's 2015-16 and 2016-17 income years will be increased access years, and in determining whether the lock out rule applies from the 2017-18 income year, the 2015-16 income year and earlier income years are disregarded. Because the 2016-17 income year is the last of the small business entity's increased access years, that year will continue to be relevant for determining whether the small business entity is subject to the lock out rule for the 2017-18 income year, and later income years. If for some reason the small business entity opted out of the small business capital allowance provisions in its 2016-17 income year, the small business entity will be locked out from the provisions for at least the next five income years.

Example 1.7 Caroline's Language Centre Pty Ltd (Caroline's Language Centre) is a small business entity that has an early balancing substituted accounting period which ends on 31 March. Caroline's Language Centre increased access years are the 2015-16 and 2016-17 income years because those years both end during the period that goes from 12 May 2015 to 30 June 2017. Caroline's Language Centre's 2014-15 income year is not an increased access year because it ends before 31 March 2015.Caroline's Language Centre did not apply the small business capital allowance provisions in its 2013-14 income year. Despite this, Caroline's Language Centre can apply the small business capital allowance provisions in its increased access years (being its 2015-16 and 2016-17 income years).In determining whether Caroline's Language Centre is able to apply the small business capital allowance provisions in its 2017-18 income year, only the election in the 2016-17 income year is relevant. If Caroline's Language Centre chose not apply the small business capital allowance provisions in its 2016-17 income year, it will be locked out from applying the rule for at least five years, commencing from its 2017-18 income year.

Consequential amendments

1.40 Consequential amendments are made to Subdivision 328-D to insert notes indicating that the $1,000 threshold in that Subdivision is increased to $20,000 between 12 May 2015 and 30 June 2017. [Schedule 1, items 1 to 8, note 3 at the end of subsection 328-175(10), notes at the end of subsections°328-180(1) to (3), note at the end of subsection 328-210(1), notes at the end of subsections 328-250(1) and (4), and note at the end of subsection 328-253(4)]

1.41 The consequential amendments to Subdivision 328-D commence on the day this Bill receives Royal Assent. Because the changes to the threshold are temporary, most of the consequential amendments will be repealed on 1 July 2019 (being two years after the threshold returns to $1,000). The consequential amendment relating to the five year lock out rule will be repealed on 1 July 2022 (being five years after the last increased access year). [Schedule 1, items 10 to 14, note 3 at the end of subsection 328-175(10), notes at the end of subsections 328-180(1) to (3), note at the end of subsection 328-210(1), notes at the end of subsections 328-250(1) and (4), and note at the end of subsection 328-253(4)]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

1.42 Schedule 1 to this Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

1.43 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.

1.44 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.

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

Human rights implications

1.46 Schedule 1 to this Bill does not engage any of the applicable rights or freedoms.

Conclusion

1.47 Schedule 1 to this Bill is compatible with human rights as it does not raise any human rights issues.

REGULATION IMPACT STATEMENT

Expanding accelerated depreciation for small businesses

Background

1.48 The Australian economy is in transition and faces significant structural challenges due to both domestic and international factors. Mining investment is now detracting from GDP growth. The switch to broader-based growth driven by activity in non-resource sectors is occurring, but perhaps more slowly than is desirable.

1.49 Below trend economic growth is leading to spare capacity in the labour market and increasing unemployment, particularly youth unemployment. Economic growth has been below its long run average in 5 of the past 6 financial years, weighing on job creation and contributing to a gradual upward drift in unemployment.

1.50 Low interest rates, a falling Australian dollar and real wage adjustment over time are expected to support employment and encourage business growth over the longer term.

1.51 There have been some positive signs the required adjustment is underway, including job advertisements showing a slight upward trend in recent months[1].

1.52 However there is a risk of the adjustment being a protracted one, particularly given businesses remain reluctant to invest and take on new workers absent stronger, sustainable demand.[2] Investment in the non-mining sectors continues to be subdued,[3] and small businesses have responded by scaling back the level of their capital spending.[4] Longer term capital expenditure plans have also been revised down significantly in the non-mining sector, notwithstanding solid growth this year.

1.53 The Government committed to expanding accelerated depreciation for small businesses (both incorporated and unincorporated businesses with aggregated turnover less than $2 million). In the 2015-16 Budget, the Treasurer announced small businesses could fully and immediately deduct depreciating assets costing less than $20,000 (increased from the current level of $1,000) from 7:30 pm May 12, 2015 until 30 June 2017.

The problem

1.54 Small businesses make an important contribution to the Australian economy. They account for the vast majority of the active private businesses in the country and represent large shares of its employment and value added.

1.55 There are currently around 2.3 million small businesses in Australia (defined as having less than $2 million turnover). According to the Australian Bureau of Statistics, small businesses provide around 43 per cent of non-financial private sector jobs in Australia and around one third of non-financial output in 2012-13.[5] The small business sector has the potential to contribute strongly to national growth and competitiveness, including providing greater employment opportunities. Small businesses have the advantage of being adaptable and flexible, able to respond profitably to changing circumstances. Studies indicate that it is small businesses that are often the entities that test and pioneer innovative ideas and business practices, which are critical to future economic growth, job prospects and improved living standards.

1.56 However, 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 companies. A comparison of the outcomes of the NAB survey of large companies, with the Sensis survey of small businesses undertaken by the Reserve Bank suggests that conditions for small business have been weaker than for larger businesses since the global financial crisis in 2008-09.[6]

1.57 One issue is regulatory costs; incorporated small businesses face higher proportional regulatory costs than larger companies due to their inability to take advantage of economies of scale in understanding and complying with regulation.

1.58 The other main issue for small companies is access to finance. Funding for small businesses is essential to facilitate productivity growth and job creation. Improving small business's access to finance was a Government election commitment.[7]

1.59 Allowing small businesses to immediately deduct most business assets they purchase under $20,000 would encourage small businesses to invest in new assets or replace old, out-dated equipment. This will support small businesses to invest in the assets they need to grow their business and prosper in the future.

Case for government action / Objective of reform

1.60 While it is businesses that create jobs, there is a clear role for Government to address impediments and create the right conditions for Australian small businesses to grow and become more productive. With the economy facing below-trend growth, the Government's objective is to stimulate small business investment, growth and employment.

1.61 The Australian economy is in transition. The declining terms of trade and the ageing of the population are placing downward pressure on income growth. Small business is a key driver of Australia's economy, underpinning growth and innovation and providing jobs for millions of Australians.

1.62 Small businesses are typically more vulnerable to shocks and changes in economic conditions than larger businesses. This makes it particularly important that, during this period of economic transition, the policy settings support small business growth and innovation. This proposal will encourage small businesses to invest in the assets they need to grow and service their customers.

1.63 Providing small businesses with a $20,000 threshold for immediate deduction encourages investment. Investment is important as it leads to existing output being produced at a lower cost and new and improved ways of doing business (innovation), which improves the amount of output produced for each unit of input, including labour (productivity). As a result, higher investment can lead to both higher employment and wages over time.

Policy options

Option 1: No policy change.

1.64 Under this option, no new actions would be taken by the Government and existing policy settings would be relied upon. The existing simplified depreciation rules allow small businesses to immediately deduct most assets that cost less than $1,000. Assets that are purchased for $1,000 or more can be added to the general small business pool (the pool) in the second year after they have been depreciated at a starting rate of 15 per cent in the first year. The pool is always depreciated at a rate of 30 per cent each year. Thus, the effective depreciation schedule for assets purchased by small business and placed in the pool is 15 per cent in the first year and 30 per cent for each year after. If the pool reaches a value below $1,000, the entire pool can be immediately deducted. The pool reduces the requirement to track the tax value of assets over multiple years because once an asset is in the pool, it is no longer depreciated individually, but as part of the pool at one constant rate.

1.65 Businesses which opt-out of the simplified depreciation rules are prevented from re-entering for five years.

Option 2: Expanded accelerated depreciation ($20,000) for small businesses:

1.66 Under this option, the simplified depreciation rules would be changed to allow small business to receive an immediate tax deduction for most individual assets they purchase costing less the $20,000 (up from the current threshold of $1,000).

1.67 This $20,000 threshold applies to each individual asset purchase. Small businesses can apply this $20,000 rule to as many individual items as they wish. Assets costing above this amount could be placed in the pool and depreciated at the rates mentioned in option 1.

1.68 This option exempts businesses which have opted-out out of the simplified depreciation rules from the lock-out rules.

1.69 These arrangements start at 7:30 pm 12 May 2015 (Budget night) and continue until 30 June 2017.

Option 3: Expanded accelerated depreciation ($15,000) for small businesses:

1.70 This option is the same as option 2; however, the threshold would be $15,000 instead of $20,000.

Cost benefit analysis of each option / Impact analysis

Option 1: No policy change.

1.71 This option involves no new actions by the Government and relies on existing policy settings. Consequently, it would introduce no new impacts on businesses, community organisations or individuals. At the same time, it would not address the issues identified in the problem section.

1.72 As noted in the background, low interest rates, a falling Australian dollar and real wage adjustment over time can be expected to support employment and encourage business growth over the longer term, along with increasing infrastructure investment and already announced measures to reduce regulation and red tape burden to make it easier to do business. However, a long, drawn out adjustment process would have substantial social costs, as identified in the Problem section.

Option 2: Expanded accelerated depreciation ($20,000) for small businesses (preferred option):

1.73 This option involves expanding accelerated depreciation for small businesses from 7:30 pm 12 May 2015 until 30 June 2017. The threshold for immediate deduction would be raised to $20,000 for this period. After these two income years, the threshold would revert to $1,000.

1.74 A simple example of how small business benefits from this proposal is to look at the cash flow that results from the expansion of accelerated depreciation:

·
A company that purchases an asset for $19,999 with the current policy settings would be able to depreciate the asset by $3,000 (15 per cent of $19,999) in the first year and $5,100 (30 per cent of $16,999) in the second year, by using the pool. The cash flow the company would receive from these depreciation amounts are $855 for the first year (assuming a 28.5 per cent small company tax rate) and $1454 in the second year. The company would continue to depreciate the pool at 30 per cent until the pool was under $1,000, at which point the entire pool could be written off.
·
Under the $20,000 option, the company would be able to immediately deduct the entire $19,999 in the first year. The cash flow the company would receive from this change is $5,700 in the first year. In the second year, there is no further depreciation of this asset as it has been written off completely. This means that the company is paying more tax in the second year relative to the scenario for the existing arrangements.

1.75 While the cash flow under both scenarios is close to being the same after ten or fifteen years, it can be this extra cash flow upfront that makes the difference between a small business surviving or not. With the extra $4,845 in cash flow that the company in the scenario above would receive under the $20,000 option, it may reinvest that money into more equipment or employ more staff. Alternatively, it may choose to pay down some of its borrowing and reduce interest payments. Both of these benefits may have a further cash flow benefit.

Option 3: Expanded accelerated depreciation ($15,000) for small businesses:

1.76 This option involves expanding accelerated depreciation for small businesses for 7:30 pm 12 May 2015 until 30 June 2017. The threshold for immediate deduction would be raised to $15,000 for this period. After these two income years, the threshold would revert to $1,000.

1.77 The same analysis applies for this option as the $20,000 option, above. However, as the threshold for immediate deductibility is lower, the cash flow benefits are lower. The overall cost to government revenue for this proposal would be lower than option 2, but the benefit to small business would also be lower. In addition, option 2 presents a larger compliance saving than this option.

Benefits

1.78 Expanding accelerated depreciation for small businesses will benefit small business taxpayers who use the simplified small business depreciation arrangements under section 328-D of the Income Tax Assessment Act 1997.

1.79 The proposal does not change the total quantum of deductions available to businesses. Instead it allows businesses to deduct the cost of more assets immediately rather than over a period of time.

1.80 Increasing the rate at which small businesses can depreciate capital expenditures would improve small business's cash flow by releasing funds that would otherwise be tied up in depreciating assets. Small businesses tend to be more vulnerable to cash flow problems than larger businesses because their profitability tends to be more volatile and they have lower levels of retained earnings. The impact is expected to be bigger for new small businesses, as large capital expenditures often occur early in a business's life.

1.81 The measure will also encourage additional capital investment by small businesses through lowering the pre-tax rate of return required to justify new investments.

1.82 A temporary threshold would see some business bring forward capital purchases from future years. The costings incorporate this behaviour, but the magnitude of this is not anticipated to have anything beyond a negligible impact on the economy.

1.83 The proposal also extends the higher threshold for immediate deductibility to the small business depreciation pool. This will further benefit small businesses cash flow and reduce compliance costs through allowing businesses to depreciate the assets included in the general small business depreciation pool more quickly.

1.84 There will be a compliance cost saving for small businesses through not needing to maintain a depreciation schedule for assets costing less than the proposed threshold of $20,000. The current threshold is $1,000. There will also be less complexity in filling out tax return forms for small business entities as depreciation amounts for assets below $20,000 will no longer need to be calculated. The gross compliance cost saving is estimated to be $6.1 million per year for option 2 (table 1) and $4.0 million for option 3 (table 2).

Table 1.1 : Regulatory burden and cost offset estimate table (option 2)
Average annual regulatory costs (from business as usual)
Change in costs ($ million) Business Community Organisations Individuals Total change in cost
Total, by sector -$6.1 million $ $ -$6.1 million
Cost offset ($ million) Business Community organisations Individuals Total, by source
Agency $ $ $ $
Are all new costs offset?
¨ Yes, costs are offset     ¨ No, costs are not offset     ¨  Deregulatory-no offsets required
Total (Change in costs - Cost offset) ($ million) = -$6.1 million
Table 1.2 : Regulatory burden and cost offset estimate table (option 3)
Average annual regulatory costs (from business as usual)
Change in costs ($ million) Business Community Organisations Individuals Total change in cost
Total, by sector -$4.0 million $ $ -$4.0 million
Cost offset ($ million) Business Community organisations Individuals Total, by source
Agency $ $ $ $
Are all new costs offset?
¨ Yes, costs are offset     ¨ No, costs are not offset     ¨  Deregulatory-no offsets required
Total (Change in costs - Cost offset) ($ million) = -$4.0 million

Costs

1.85 Option 2 will result in an estimated revenue cost to the Budget of $1.8 billion over the forward estimates and the equivalent number for option three is $1.2 billion.

1.86 There will be some transitional compliance costs to small business entities associated with the proposal, largely relating to understanding the change, but these are expected to be small compared to the ongoing compliance saving associated with the measure. This is because the change builds on existing depreciation pooling arrangements which are well understood by taxpayers - with the only change being to the asset value threshold to which these arrangements apply.

1.87 Limiting the increase to two years would have a smaller reduction in regulatory costs than an ongoing option. This is primarily because of the short timeframe necessarily limiting the period small businesses would benefit from simplified record keeping. In addition, some businesses would be expected to engage in evaluating the timing of their acquisitions to maximise their tax benefit in the two years, further reducing the net regulatory savings from the proposal. Options 2 and 3 are likely to lead to a small increase in compliance costs for small businesses in year 3, when the threshold reverts to $1000. At this point, for assets greater than $1000, small businesses will be required to establish or add to a pooling arrangement.

1.88 Implementation costs are also expected to be slightly higher than under an ongoing option due to the additional learning costs associated with the threshold reverting back to $1,000 after two years. These increased compliance costs are incorporated in the compliance tables above.

Net Benefit

1.89 Options 2 and 3 will deliver a reduction in compliance costs for small businesses, particularly those that are capital intensive, through simplifying their tax arrangements and the record keeping required from 12 May 2015 through to 30 June 2017.

1.90 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.

1.91 Data are not yet available to accurately assess a previous version of this policy. Even when they are, this kind of analysis can be difficult.

Consultation

1.92 The tax proposals have been informed by targeted consultation with tax specialists outside government, including the Board of Taxation (the Board), on a confidential basis. Options were discussed with the Board on a couple of occasions, to give particular Board members an opportunity to provide feedback and to ask follow-up questions. This included the incorporated and unincorporated tax cuts. The Board's positive feedback was a factor in deciding on particular parameters in the final policy design.

1.93 The Treasury also consulted with the Australian Tax Office in order to identify any implementation issues, integrity concerns with the proposals, as well as any potential flow-on impacts they might have within the broader tax framework.

1.94 The limited consultation on the proposals reflects the cabinet-in-confidence nature of the decision making process. However, it should be noted that the proposed tax options have already been the subject of, and informed by, extensive consultations undertaken as part of previous policy processes. Specifically, the Australia's Future Tax System (the Henry Review) report included a recommendation to increase the threshold for immediate deductibility to $10,000 (Recommendation 29), alongside simplified depreciation rules to reduce complexity and compliance costs for small businesses.

1.95 Several stakeholders also have argued for an increase to the threshold, including the Australian Chamber of Commerce and Industry in its pre-Budget submission. ACCI supported the Henry Review's earlier recommendation to increase the threshold for immediate asset write-off to $10,000 in the income year the asset is first used or installed. The Australian Industry (Ai) Group similarly supported a period of accelerated depreciation for investments in plant and equipment and a lift in the small business instant asset write-off to $6,000.

1.96 Announcement of $20,000 instant asset write-off for small businesses in the Budget received a generally positive response from stakeholders. The Council of Small Businesses of Australia (COSBOA) released a media statement 12 May 2015 welcoming the changes to accelerated depreciation, stating they would work to assist small businesses to start up, operate and if desired, grow. Kate Carnell, CEO of the ACCI, stated the measures announced in the Budget would "turbocharge small businesses" and help restore plunging small business confidence (May 18, 2015), while the Australian Dental Industry Association (ADIA) described the increased threshold as an "exciting initiative for small business...in the dental industry and economy overall".

1.97 As the implementing legislation is to be introduced as a 2015 Winter T Bill, there will not be time for the release of exposure draft legislation. This is not considered an issue since the legislation is expected to be relatively straightforward as it is essentially a rate change.

Option selection / Conclusion

1.98 The preferred option is to expand accelerated depreciation for small businesses by providing a $20,000 threshold for immediate deductibility (option 2) from 7:30 pm 12 May 2015 until 30 June 2017.

1.99 This option strikes a balance between encouraging investment and economic growth and ongoing budget repair.

Implementation and evaluation / review

1.100 Legislation is required to implement the proposal. As the Government has set the start date as 7:30 pm 12 May 2015, accelerated depreciation is scheduled with the small business company tax cut because it needs to be a Winter T Bill and enacted by 30 June 2015 (so taxpayers can claim their deductions for the 2014 15 income year).

1.101 The design of the legislation is expected to be relatively straightforward largely relying on current models in the tax system.

1.102 The ATO would be responsible for administering the tax rules applying to small businesses. The ATO and Treasury are experienced in implementing this type of reform.

1.103 For options 2 and 3, the rules around asset eligibility do not change. That is, if an asset was eligible for immediate deductibility under the current $1,000 threshold it will continue to be deductible under the new $20,000 threshold.

1.104 However, to ensure the proposal operates as intended, the ATO will engage with small businesses based on their behaviour and choices. This will include providing clear guidance so that businesses intending to utilise the provisions find it as easy as possible to do so.

1.105 If small businesses exhibit behaviours that indicate a high level of risk, they can expect a higher level of interaction with the ATO. The ATO has a risk-based program to identify taxpayers that are not meeting their obligations and will take measured approaches to influence taxpayer behaviour.

1.106 The benefit of this measure should not be assessed in isolation but considered as part of the small business package.

Chapter 2 - Accelerated depreciation for primary producers

Outline of chapter

2.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to allow taxpayers carrying on a primary production business (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.

2.2 All legislative references in this Chapter are to the Income Tax Assessment Act 1997 unless otherwise indicated.

Context of amendments

2.3 As part of the Government's commitment to ensure a sustainable and competitive Australian agriculture sector, the Government sought the views of stakeholders through the Agricultural Competitiveness White Paper process.

2.4 As part of this process, stakeholders raised a suggestion regarding drought preparedness and the role that the tax system plays in encouraging primary producers to invest in assets that allow them to prepare for drought in the best way that suits their business.

2.5 Currently, the tax system allows primary producers to deduct capital expenditure on a depreciating asset (an asset with a limited effective life that can reasonably be expected to decline in value over the time it is used). In most cases, primary producers can deduct their expenditure as the asset declines in value over its effective life.

2.6 For many assets used in a primary production business the effective life can be many years. The requirement for primary producers to spread deductions over many years can reduce their cash flow and deter them from undertaking capital expenditure that may enhance the profitability and productivity of their farm.

2.7 The existing depreciation arrangements may also impose unnecessary compliance costs on primary producers as they use many different types of assets, each of which may have its own effective life. In addition, the effective lives of some assets may not always reflect commercial or economic differences.

2.8 This measure shortens the timeframes over which primary producers can deduct capital expenditure on fodder storage assets, water facilities and fencing assets. This will encourage primary producers to invest in these assets which are an important part of mitigating and managing the risks of drought. This measure will also assist primary producers with cash flow and reduces the amount of time for which records must be kept.

Summary of new law

2.9 Schedule 2 to this Bill allows primary producers to deduct capital expenditure on fodder storage assets over three years, and deduct capital expenditure on water facilities and fencing assets in the year in which the expenditure is incurred.

Comparison of key features of new law and current law

New law Current law
Primary producers may deduct capital expenditure on a fodder storage asset over three years. Primary producers may deduct capital expenditure on a fodder storage asset over the effective life of the asset.*
Primary producers may deduct capital expenditure on a water facility in the year in which the expenditure is incurred. Primary producers may deduct capital expenditure on a water facility over three years.*
Primary producers may deduct capital expenditure on a fencing asset in the year in which the expenditure is incurred. Primary producers may deduct capital expenditure on a fencing asset over the effective life of the asset.*
*Primary producers that are small business entities may be able to choose to deduct certain capital expenditure over a shorter timeframe.

Detailed explanation of new law

2.10 Schedule 2 to this Bill allows taxpayers carrying on a primary production business to deduct capital expenditure on fodder storage assets over three years, and deduct capital expenditure on water facilities and fencing assets in the year in which the expenditure is incurred.

2.11 A primary production business includes a business to cultivate plants, maintain animals, conduct fishing operations or fell trees. The full definition is contained in subsection 995-1(1).

2.12 These amendments will be included in Division 40-F and operate as an exception to the general rules applying to deductions of capital expenditure on depreciating assets contained in Division 40.

Fodder storage assets

2.13 Primary producers will be able to deduct expenditure on fodder storage assets over three income years. [Schedule 2, item 17, section 40-548]

2.14 Previously, a primary producer could deduct the capital expenditure on a fodder storage asset over the effective life of the asset. The Commissioner of Taxation had determined that this could be between 10 and 50 years, depending on the asset.

2.15 The availability of accelerated depreciation is limited to capital expenditure incurred on the construction, manufacture, installation or acquisition of a fodder storage asset if that expenditure was incurred primarily and principally for use in a primary production business conducted on land in Australia. [Schedule 2, item 14, section 40-525]

Meaning of fodder storage asset

2.16 A fodder storage asset is defined as an asset that is primarily and principally for the purpose of storing fodder. A fodder storage asset is also a structural improvement, a repair of a capital nature, or an alteration, addition or extension, to an asset or structural improvement, that is primarily and principally for the purpose of storing fodder. [Schedule 2, items 11 and 12, section 40-520]

2.17 The term 'fodder' takes its ordinary meaning and refers to food for livestock, usually dried, such as grain, hay or silage. Common examples of fodder storage assets include silos, liquid feed supplement storage tanks, bins for storing dried grain, hay sheds, grain storage sheds and above-ground bunkers for silage.

2.18 Although a fodder storage asset will primarily be used to store food for livestock, it may also store fodder which can be used for human consumption. Where a fodder storage asset is used to store fodder that can be used for animal consumption or human consumption, such as grain, it will still be an asset to which this measure applies.

2.19 A repair of a capital nature or an alteration, addition or extension, to an asset or structural improvement, that is primarily and principally for the purpose of storing fodder will be a separate depreciating asset, ensuring that deductions for capital expenditure on those assets are not denied solely by the operation of sections 40-50 and 40-555. [Schedule 2, item 3, section 40-53]

Interaction with the capital allowance rules

2.20 Allowing the deduction over three income years is achieved by providing that a fodder storage asset declines in value in each income year by one-third of the expenditure incurred, starting from the income year in which the primary producer first incurred expenditure on the asset. [Schedule 2, items 5, 6, 15 and 17, sections 40-515, 40-530 and 40-548]

2.21 Therefore, one third of the expenditure can be deducted in the income year in which the expenditure is incurred, and the same amount can be deducted in each of the following two income years.

Example 2.1 Aware of the variable nature of Australia's seasonal conditions, Woolly Friends Sheep Station builds a new silo to store grain, allowing them to supplement the diets of their sheep when pasture growth is insufficient. The silo is paid for and built in the 2016-17 income year, and Woolly Friends incurs capital expenditure of $150,000.Woolly Friends may deduct $50,000 in each of the 2016-17, 2017-18 and 2018-19 income years, so the expenditure has been completely deducted within three years.

2.22 In each income year where the fodder storage asset was not wholly used in carrying on a primary production business on land in Australia, or was not wholly used for a taxable purpose, the primary producer must apportion the deduction and reduce the amount of the deduction by any part of the decline in value attributable to any such period within the income year. [Schedule 2, items 8 to 10, subsection 40-515(4)]

2.23 This prevents primary producers from deducting expenditure on a fodder storage asset to the extent that the asset is used other than in carrying on their primary production business or for a taxable purpose.

Example 2.2 Assume the same facts in Example 2.1 above. However, it turns out that better-than-expected pasture growth in 2017-18 means that Woolly Friends does not need to supplement the diet of their sheep with grain. Therefore, for three months from October 2017 to January 2018 the silo is used for private storage rather than storing grain to feed the sheep.Since the silo was not being wholly used in carrying on a primary production business or for a taxable purpose for three months, Woolly Friends must reduce their deduction in for the 2017-18 income year by one quarter of the decline in value for that income year, or $12,500.

Conditions on the accelerated deduction for fodder storage assets

2.24 There are conditions that apply to the accelerated deduction for fodder storage assets. Primarily, the total deduction over the three income years cannot be more than the amount of capital expenditure. [Schedule 2, item 7, section 40-515]

2.25 In addition, amounts cannot be deducted for the acquisition of a fodder storage asset if any entity has deducted, or can deduct, an amount under Subdivision 40-F for any income year for earlier capital expenditure on the construction or manufacture of the asset or a previous acquisition of the asset. [Schedule 2, item 19, section 40-555]

2.26 Additional conditions placed on the accelerated deductions of other depreciating assets used by primary producers will also apply. In particular, under Subdivision 40-F, the amount of expenditure may be taken to be market value if the transactions were not at arm's length and the amount of expenditure would otherwise have been more than the market value of the asset. Additionally, expenditure incurred by a partnership will be allocated to each of the partners of the partnership.

Water facilities

2.27 Primary producers and irrigation water providers will be able to deduct expenditure on water facilities immediately in the year in which the expenditure is incurred.

2.28 Previously, primary producers and irrigation water providers could deduct capital expenditure on water facilities over three years.

2.29 Water facility is already defined in section 40-520, and means:

·
plant or a structural improvement, or a repair of a capital nature, or an alteration, addition or extension, to plant or a structural improvement, that is primarily or principally for the purpose of conserving or conveying water; or
·
a structural improvement, or a repair of a capital nature, or an alteration, addition or extension, to a structural improvement, that is reasonably incidental to conserving or conveying water.

2.30 Immediate deduction of expenditure is achieved by providing that a water facility is taken to decline in value by the full amount of the expenditure incurred. The decline in value starts in the income year in which the expenditure is first incurred, allowing full deduction of the expenditure in that income year. [Schedule 2, item 16, section 40-540]

2.31 These amendments apply to irrigation water providers in addition to primary producers. This continues the existing equivalence of treatment given to irrigation water providers and primary producers for deductions of capital expenditure on water facilities.

2.32 Under the existing provisions, expenditure cannot be deducted for the acquisition of a water facility if any person has deducted or can deduct an amount under Subdivision 40-F for any income year for earlier capital expenditure on the construction or manufacture of the facility or a previous acquisition of the facility.

2.33 These amendments extend this condition to prevent deductions for the acquisition of a water facility if any entity has deducted, or can deduct, an amount under Subdivision 40-F for any income year for earlier capital expenditure on the construction or maintenance of the facility or a previous acquisition of the facility. This will ensure the provision operates as intended. [Schedule 2, item 18, subsection 40-555(1)]

2.34 These amendments also correct existing notes in section 40-525 to remove an erroneous reference to a determination made under subsection 250-150(3), because that subsection does not provide for the making of determinations. [Schedule 2, item 13 , subsections 40-525(1) and (2) (paragraph (a) of the note)]

2.35 The remaining provisions in Subdivision 40-F will continue to apply to water facilities in the same way as they did before the amendments.

Fencing assets

2.36 Previously, a primary producer could deduct the capital expenditure on a fence in different ways depending on what the fence was used for. Generally, a primary producer could deduct the capital expenditure on a fence over the effective life of the asset. The Commissioner of Taxation had determined that this could be up to 30 years, depending on the asset.

2.37 Alternatively, in certain cases, primary producers could immediately deduct capital expenditure on fences as part of a landcare operation (including fences built for certain purposes relating to landcare) or over three years on fences as part of a water facility.

2.38 This measure provides consistency by allowing primary producers to deduct expenditure on fencing assets immediately in the year in which the expenditure was incurred. [Schedule 2, item 17 section 40-551]

2.39 The availability of accelerated depreciation is limited to capital expenditure incurred on the construction, manufacture, installation or acquisition of a fencing asset if that expenditure was incurred primarily and principally for use in a primary production business conducted on land in Australia. [Schedule 2, item 14, section 40-525]

Example 2.3 Kev carries on a business of breeding cattle and owns a large cattle station in the Pilbara region. Out the front of his homestead Kev decides to grow some Red Kangaroo Paw flowers for his own aesthetic pleasure. However, Kev's dog 'Hogey' keeps getting into the flower patch and ruining them.In the 2017-18 income year, Kev decides to build a fence around the flower patch to keep Hogey out.Whilst Kev carries on a primary production business and the fence around the flower patch is on his land (in Western Australia), the fence is not principally for use in the primary production business and he is therefore unable to deduct the expenditure incurred in the construction of the fence.

Example 2.4 Assume the same facts in Example 2.3, however, Kev was growing the Red Kangaroo Paw flowers in an empty field on his property and sells them as part of his primary production business.In this case, the fence erected around the flowers to keep out Hogey and his other domesticated animals would be considered principally for use in Kev's primary production business. For that reason, assuming the other conditions are met, Kev can depreciate the expenditure incurred in the construction of the fence.

Meaning of fencing asset

2.40 A fencing asset is an asset or structural improvement that is a fence, or a repair of a capital nature, or an alteration, addition or extension, to a fence. [Schedule 2, items 11 and 12, section 40-520]

2.41 The term 'fence' takes its ordinary meaning and includes an enclosure or barrier, usually of metal or wood, as around or along a field, or paddock. The term 'fence' extends to parts or components of a fence including, but not limited to, posts, rails, wire, droppers, gates, fittings and anchor assemblies.

2.42 A repair of a capital nature, or an alteration, addition or extension, to a fencing asset will be a separate depreciating asset, ensuring that deductions for capital expenditure on those assets are not denied solely by the operation of sections 40-50 and 40-555. [Schedule 2, item 3, section 40-53]

Interaction with the capital allowance rules

2.43 Immediate deduction of expenditure is achieved by providing that a fencing asset will be taken to decline in value by the full amount of the expenditure incurred.

2.44 The decline in value starts in the income year in which the expenditure is first incurred, allowing full deduction of the expenditure in that income year. [Schedule 2, items 5, 6, 15 and 17, sections 40-515, 40-530 and 40-551]

Example 2.5 Amanda carries on a business in Victoria planting trees for felling. Her neighbour, Sam, has a large amount of land backing onto her plantation, which he uses for private recreational purposes. Amanda and Sam construct an electric boundary fence to demarcate their plots of land and prevent Sam's pet horses from entering Amanda's plantation and damaging the saplings. They each incur capital expenditure of $23,000 in the 2016-17 income year, which includes the purchase of posts, wire, insulators, portable energisers and other fencing materials, as well as the cost of hiring contractors to install the fence.Amanda incurred her expenditure in the construction of a fence primarily and principally for use in a primary production business conducted on land in Australia, so she can deduct $23,000 of expenditure in the 2016-17 income year.Sam incurred his expenditure in his private capacity, so he cannot deduct any amount for the construction of the fence.

2.45 In the income year that expenditure is incurred, the primary producer must reduce the amount of the deduction by any part of the decline in value attributable to any period within the income year where the fencing asset was not wholly used in carrying on a primary production business on land in Australia, or was not wholly used for a taxable purpose. [Schedule 2, items 8 to 10, section 40-515]

2.46 This prevents primary producers from deducting expenditure on a fencing asset to the extent that the asset is used other than in carrying on their primary production business or for a taxable purpose.

Conditions on the accelerated deduction for fencing assets

2.47 There are conditions that apply to the accelerated deduction for fencing assets. Primarily, the total deduction cannot be more than the amount of the capital expenditure. In addition, amounts cannot be deducted on a fencing asset:

·
if, in acquiring the fencing asset, any entity has deducted or can deduct an amount under Subdivision 40-F for any income year for earlier capital expenditure on the construction or manufacture of the fence or a previous acquisition of the fence;
·
to the extent that any person has deducted or can deduct the amount as expenditure on a landcare operation under subsection 40-630(1); or
·
if the fencing asset is (or is a repair, alteration, addition or extension to) a stockyard, pen or portable fence.

[Schedule 2, items 7 and 19, sections 40-515 and 40-555]

2.48 Additional conditions placed on the accelerated deductions of other depreciating assets used by primary producers will also apply. In particular, under Subdivision 40-F, the amount of expenditure may be taken to be market value if the transactions were not at arm's length and the amount of expenditure would otherwise have been more than the market value of for the asset. Additionally, expenditure incurred by a partnership will be allocated to each of the partners of the partnership.

Interaction with the accelerated depreciation rules for small business entities

2.49 Primary producers that are small business entities (as defined in section 328-110) with an aggregated turnover of less than $2 million may choose, on an asset-by-asset basis, to accelerate the deductions of certain capital expenditure under either Subdivision 328-D or Subdivision 40-F (as per subsection 328-175(3)). This choice will remain open to primary producers, as the Subdivision 328-D rules may result in a more favourable outcome.

Interaction with deductions for capital works

2.50 Where capital expenditure on a fodder storage asset, water facility or fencing asset is deductible under both Subdivision 40-F, or would be deductible under Subdivision 40-F if the asset were used for the purpose of producing assessable income, Division 43 does not apply (as per subparagraph 43­70(2)(f)(i)).

Consequential amendments

2.51 Schedule 2 to this Bill also makes consequential amendments to guidance provisions in sections 12-5, 40-10 and 40-510, and inserts the new definitions of fodder storage asset and fencing asset in the dictionary in section 995-1. [Schedule 2, items 1, 2, 4 and 20, sections 12-5, 40-10, 40-510 and 995-1]

Application and transitional provisions

2.52 This measure will apply 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. [Schedule 2, item 21]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

2.53 Schedule 2 to this Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

2.54 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.

Human rights implications

2.55 This Schedule promotes the rights to water and food. These rights are a subset of the right to an adequate standard of living, including adequate food, clothing and housing, specified in Article 11(1) of the International Covenant on Economic, Social and Cultural Rights.

2.56 The amendments in this Schedule encourage primary producers to invest in their businesses, increasing food productivity, drought preparedness and access to water resources in Australia's agricultural sector.

Conclusion

2.57 This Schedule is compatible with human rights as it does not raise any human rights issues.

REGULATION IMPACT STATEMENT

A new drought preparedness framework - accelerated depreciation for primary producers

The problem

2.58 This measure will address two issues. Both issues were raised by stakeholders as part of the consultation process for the Agricultural Competitiveness White Paper (ACWP).

(a) Difficulty in preparing for drought by primary producers

2.59 Agriculture is a significant and growing contributor to the Australian economy, contributing over $50 billion in production, over $40 billion in exports and around 300,000 in employment. 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.

2.60 While variation in seasonal conditions is a normal risk that farmers manage, the occurrence of extreme, prolonged and widespread drought creates social and financial pressures on the farm community. The cost to Government in responding to such events can be enormous, with drought assistance in the 2000s amounting to over $4 billion.

2.61 Primary producers' investment in water facilities and fodder storage can be an important part of mitigating and managing the risks of drought.

2.62 Primary producers can deduct the loss in the value of capital goods, such as machinery and tanks, through claiming depreciation against their income. Currently, primary producers can deduct the value of water facilities over three years, while fodder storage assets can be deducted over 10 to 50 years, depending upon the asset. The requirement for primary producers to spread deductions over many years can reduce their cash flow and deter them from undertaking capital expenditure which could improve the financial resilience of their farm in the event of drought.

2.63 In some cases, investing in fencing may be part of managing drought risks. For example, erecting fencing may help farmers more heavily graze existing land, better manage their environment or protect their crops and livestock against pests.

(b) Complicated depreciation arrangements for primary producers

2.64 Submissions to the ACWP identified the need to simplify the depreciation arrangements for primary producers. Complex depreciation requirements are particularly significant for fencing, which is currently depreciated up to 30 years, depending on the type of fence.

2.65 The existing depreciation arrangements impose unnecessary compliance costs on primary producers as they use many different types of assets, each of which may have its own effective life. Primary producers must keep records for the effective life of each asset. For example, they currently need to keep records of their fencing assets for up to 30 years and fodder storage assets for up to 50 years.

2.66 In addition to compliance costs, the requirement for primary producers to spread deductions over many years can reduce their cash flow, deterring them from undertaking capital expenditure to enhance the financial resilience of their farm in the event of drought; consequently, productivity and profitability may be reduced.

(c) Possible inconsistent depreciation treatment of fencing

2.67 Some feedback[8] has suggested that currently farmers do not always capitalise their fencing costs, and instead repair sections of fences so that the cost can be written off immediately. There is no reliable data available to confirm whether this practice is common. However, if some farmers do claim fencing capital expenditure as a repair while others do not, it may result in different tax outcomes for the same expenditure.

Case for government action / Objective of reform

2.68 The consultation process for the ACWP has indicated that there are issues with the depreciation arrangements for different assets, such as the long period required to recoup initial capital expenditure and costs incurred in depreciating assets over time. As a result, primary producers may undertake too little investment in preparing for drought.

2.69 While the Government can't prevent drought, there is a clear role for Government to address impediments and create the right conditions for farmers to invest for the future. Accelerated depreciation encourages farmers to better manage and mitigate the risks of severe weather events, which can in turn reduce the significant cost on the Government in responding to drought. On 9 May 2015, the Government announced new funding of $333 million to support farmers, farm businesses and rural communities affected by drought.

Policy options

Status quo:

2.70 Farmers are able to claim tax deductions as the value of an asset used in generating business income declines over time. Generally, assets are depreciated over their effective life as self-assessed by the taxpayer or as determined by the Commissioner of Taxation (the Commissioner). The Commissioner publishes detailed tables of the effective lives for different common assets and different types of businesses.

2.71 The shorter the effective life of an asset, the larger the tax deductions can be claimed in each year. These tax deductions can be used to reduce the taxpayer's taxable income and hence overall tax paid (if a taxpayer is in a profit position).

2.72 Currently there is a range of depreciation treatments applicable to primary producers. This means farmers have to invest time and effort determining the appropriate effective life to use and track their tax deductions over time.

Water facilities:
·
Compared to the Commissioner's determination, water facilities attract concessional treatment and are currently depreciated over three income years.

-
Examples of water facilities include: dams, water tanks, bores, wells, irrigation channels, pipes, pumps, water towers and windmills.

Fodder storage assets:
·
Fodder is food given to domesticated livestock, such as cattle, goats, sheep, horses, chicken and pigs. Examples of fodder include hay, straw, silage, compressed and pelleted feeds, oils and mixed rations, and sprouted grains and legumes.
·
The effective lives for fodder storage assets from the Commissioner's determination range from 10 to 50 years.

-
For example: dry feed systems for pig farming have an effective life of 10 years, steel silos for dairy cattle farming have an effective life of 20 years, and concrete silos and bins used for storing dry grain for beef cattle feedlots are estimated to last 50 years.

Fencing:
·
In the Commissioner's determination, there are a range of effective lives for different types of fencing.

-
For example, portable fence energisers for electric fences have an effective life of 5 years, electric fences have an effective life of 20 years, and general fences have an effective life of 30 years.

·
As discussed above, there is also some ambiguity about whether taxpayers always depreciate their fences over the effective life or if they just repair sections of fences at a time and immediately expense the cost of repair.

Option 1: Delay until Tax White Paper

2.73 One option is to take no action now, and defer any tax related proposals for primary producers to the Government's Tax White Paper process.

Option 2: Water facilities

2.74 Provide an upfront deduction for all capital expenditure on water facilities. This includes assets such as bores, dams, pumps, water tanks, troughs and irrigation systems.

Option 3: Fodder storage assets

2.75 Provide a three year write off for all fodder storage assets. This includes assets such as liquid feed supplement storage tanks, silos and bins used for storing dry grain.

Option 4: Fencing

2.76 Enable primary producers to fully and immediately deduct capital expenditure on fencing assets.

Option 5: Start date of 1 July 2016

2.77 Implement options 2, 3 and 4, all with a start date of 1 July 2016.

Option 6: Start date of 12 May 2015

2.78 Implement options 2, 3 and 4, all with a start date of 7:30pm Australian Eastern Standard Time (AEST) 12 May 2015 - Budget night.

Cost benefit analysis of each option / Impact analysis

Status quo

2.79 Currently primary producers may delay investment in additional water facilities and fodder storage assets because the assets are costly and can take a long time to be depreciated for tax purposes. This means that farmers may be inadequately prepared when drought hits, with insufficient water and fodder available to enable crops, plants and animals to survive.

2.80 Primary producers may delay investing in new fences which may reduce their profitability and productivity. Some farmers may repair sections of fences rather than replacing them with new fences, so that they don't have to deduct the cost over a long time period - up to 30 years.

2.81 In addition, some taxpayers may actually replace sections of fences but choose to call it a repair for tax purposes. This may result in different tax outcomes for farmers depending on how the expenditure is reported.

Option 1: Delay until Tax White Paper

2.82 This option relies on existing policy settings until the Tax White Paper process is finalised, even though the issues discouraging productive investment are well understood from the ACWP consultations. It would not address the issues for primary producers identified by industry through the ACWP consultation. This option would be undesirable as it does not improve primary producers' ability to prepare for drought in a timely way, especially given much of Australia is in drought.

Option 2: Water facilities

Affected Industries

2.83 Providing an immediate deduction for capital expenditure on water facilities is expected to impact the agricultural industry, particularly those engaged in primary production activities where water usage and storage is vital to their profitability and productivity.

2.84 In addition, those businesses which supply water facilities, such as irrigation systems, water tanks and pumps, will also be impacted. Earth moving businesses may also be impacted if the demand for dam construction increases.

2.85 As the demand for water facilities increases, this may have a flow-on effect to a wider group of businesses, in other sectors. For example, these other businesses may be more profitable as there is a flow-on demand for their services, more money is spent in rural communities and there is more demand for labour.

Benefits

2.86 Primary producers would benefit from an upfront deduction for all capital expenditure on water facilities. Currently water facilities are depreciated over three years. This is concessional treatment compared to the Commissioner's typical determination of water facilities. Therefore this proposal is not a major change compared to the current treatment.

2.87 However, the change would encourage farmers to invest in assets, such as water tanks and dams, when they can, so that they will be better prepared when they are faced with drought conditions. As a result, more farmers are likely to have more water on hand when drought hits.

2.88 This would assist farmers with their cash flow, so they will have more money sooner to invest, spend or pay off debt. This is due to a change in the timing of tax deductions - which will be brought forward to the first year rather than being spread out over three years. There is a timing change, but the overall size of tax deductions over time remains the same.

2.89 Farmers may bring forward the timing of future capital expenditure to benefit from the accelerated depreciation as well as investing in more expenditure given the shorter period to recoup their costs. Financial institutions may be more willing to lend famers money to invest, given their increased ability to repay any loans.

2.90 Suppliers of water facilities and other rural businesses will benefit from increased business. However, there may be limited numbers of suppliers of water facilities in regional areas. As they will be faced with increased demand, prices of water facilities could rise and they may have some difficulty finding additional, trained staff to keep up with increased demand. However, if the new arrangements are ongoing, it may enable primary producers to spread their expenditure over time and hence reduce immediate price impacts.

2.91 There will also be a revenue cost for the Government; however the revenue cost for this proposal has not been identified as it is considered part of a package.

Compliance burden estimate:

(Note: the dollar amounts below have been rounded to the nearest whole number)

2.92 Australian Taxation Office data has been used to estimate the number of taxpayers affected by the change to the depreciation treatment of water facilities.

2.93 Approximately 2,193 taxpayers have claimed an amount at the 'landcare operations and deduction for decline in the value of water facility' label on their 2013 tax return. For quantification purposes, it is assumed that approximately 60 per cent, or 1,315 businesses, will be affected by the proposal.

2.94 Of the 1,315 affected taxpayers, it is estimated that approximately 1,148 micro businesses will be affected by this proposal.

2.95 These 1,148 taxpayers will face a small education cost - as they need to become aware of the change in tax treatment.

2.96 It is estimated that it will take each taxpayer 1.14 hours to be informed of the change and apply it to their tax records. This results in an implementation cost of $75 per taxpayer, which adds up to $85,656 for the 1,148 taxpayers.

2.97 It is also estimated that around 167 small to medium sized businesses will be impacted. It is estimated to take them 2.292 hours to accommodate the change, at a cost per taxpayer of $150, and a total of $25,112 for the 167 taxpayers.

2.98 Adding up these two costs results in a total once-off implementation cost of $110,768.

2.99 It is estimated that on an ongoing basis, the micro businesses will save 0.7 hours per year in record keeping time, and the small to medium sized businesses will save 2.5433 hours per year in record keeping. This results in an ongoing compliance benefit of $80,461 per year.

2.100 Combining the implementation cost and the ongoing compliance benefit, this option has an estimated compliance benefit of $69,385 on an annualised basis.

Table 2.1 : Regulatory burden and cost offset estimate table
Average annual regulatory costs (from business as usual)
Change in costs ($ million) Business Community Organisations Individuals Total change in cost
Total, by sector -$0.07 - - -$0.07
Cost offset ($ million) Business Community organisations Individuals Total, by source
Agency - - - -
Are all new costs offset?
¨ Yes, costs are offset     ¨ No, costs are not offset   Deregulatory-no offsets required
Total (Change in costs - Cost offset) ($ million) = -$0.07

Option 3: Fodder storage assets

Affected Industries

2.101 Allowing capital expenditure on fodder storage assets to be depreciated over three years is expected to impact the agricultural industry, particularly those engaged in primary production activities where providing and storing animal feed is vital to their productivity.

2.102 In addition, those businesses which construct and supply fodder storage assets, such as silos, tanks and bins to store animal feed and hay and grain shed construction, will also be impacted.

2.103 As the demand for fodder storage assets increases, this may have a flow-on effect to a wider group of businesses and industries, such as the steel manufacturing industry.

Benefits

2.104 Primary producers would benefit from being able to claim a deduction for capital expenditure on fodder storage assets over three years. Currently fodder storage assets are depreciated over 10 to 50 years, depending on the asset. Therefore this proposal is a major change compared to current depreciation arrangements.

2.105 As well as water, having fodder available to assist with drought feeding is important for primary producers. This change would encourage farmers to invest in assets, such as silos and bins used for storing dry grain, when they can, so that they will be better prepared when they are faced with drought conditions. Farmers will have the ability to have more fodder on hand to feed their animals, when hit with drought. This will enable more farmers to retain fodder and feed more animals when a drought hits.

2.106 This would assist farmers with their cash flow, so they will have more money sooner to invest, spend or pay off debt. This is due to a change in the timing of tax deductions - the tax deduction will be spread out over only three years rather than up to 50 years. There is a timing change, but the overall size of tax deductions over time remains the same.

2.107 Farmers may bring forward the timing of future capital expenditure on fodder storage assets to benefit from the accelerated depreciation, as well as investing in more expenditure given the shorter period to recoup their costs. In addition, financial institutions may be more willing to lend farmers money to invest given their increased ability to repay any loans.

2.108 Suppliers of fodder storage assets and other rural businesses will benefit from increased business. However, there may be limited numbers of suppliers of fodder storage assets in regional areas. As they will be faced with increased demand, prices of fodder storage assets could rise and suppliers may have some difficulty finding additional, trained staff to build and install these assets to keep up with increased demand. However, if the new arrangements are ongoing, it may enable primary producers to spread their expenditure over time, give suppliers time to build and import additional fodder storage assets and hire and train more labour and hence reduce immediate price impacts.

2.109 There will also be a revenue cost for the Government, however the revenue cost for this proposal has not been identified as it is considered part of a package.

Compliance burden estimate:

(Note: the dollar amounts below have been rounded to the nearest whole number)

2.110 ATO data has been used to estimate the number of taxpayers affected by the change to the depreciation treatment of fodder storage assets.

2.111 It is estimated that there are approximately 183,000 entities with a primary production code on their tax return. A relatively small proportion of these (around 8 per cent) are assumed to be affected by this proposal, as the policy would only apply to new expenditure and many primary producers would already have existing infrastructure.

2.112 An estimated 15,000 taxpayers are likely to face a small education cost - as they need to become aware of the change in tax treatment.

2.113 It is estimated that it will take each taxpayer 1.14 hours to be informed of the change and apply it to their tax records. This equals a total compliance cost to each taxpayers of $75, for a total implementation compliance cost to taxpayers of approximately $1,119,195.

2.114 In the following years, taxpayers will have reduced compliance costs due to not having to keep records of their fodder storage assets for tax purposes. Currently fodder storage assets are depreciated over 10 to 50 years, depending upon the asset.

2.115 It is estimated the ongoing impact to be a 0.7 hour saving for each taxpayer per year, resulting in a compliance saving of $46 per taxpayer per year. This adds up to adding up to a compliance saving of $687,225 per year.

2.116 Combining the implementation cost and the ongoing compliance benefit, this option has an estimated compliance benefit of $575,305 on an annualised basis.

Table 2.2 : Regulatory burden and cost offset estimate table
Average annual regulatory costs (from business as usual)
Change in costs ($ million) Business Community Organisations Individuals Total change in cost
Total, by sector -$0.6 - - -$0.6
Cost offset ($ million) Business Community organisations Individuals Total, by source
Agency - - - -
Are all new costs offset?
¨ Yes, costs are offset     ¨ No, costs are not offset   Deregulatory-no offsets required
Total (Change in costs - Cost offset) ($ million) = -$0.6

Option 4: Fencing

Affected Industries

2.117 Providing an immediate deduction for capital expenditure on fencing assets is expected to impact the agricultural industry, particularly those engaged in primary production activities where fencing is vital to their productivity.

2.118 In addition, those businesses which manufacture fencing posts, wire, mesh and electric fence energisers will also be impacted.

2.119 As the demand for installing fencing increases, this may have a flow-on effect to a wider group of businesses and industries, such as the wire manufacturing and timber milling industries.

Benefits

2.120 Primary producers would benefit from an upfront deduction for capital expenditure on fencing. Currently fencing can be depreciated over up to 30 years, depending on the type of fence. This change would encourage farmers to invest in fencing, rather than repair old fences, and significantly simplifies the depreciation arrangements for them. Therefore this proposal is a major change compared to the current depreciation arrangements.

2.121 However this proposal will include both new fencing and repairs to fencing. Primary producers will benefit from this proposal by being able to write off both repair costs and the costs of new fences upfront. This will be clear and remove the incentive for farmers to misreport their expenditure.

2.122 Farm fencing is generally a non-negotiable expense that has important productivity enhancing, containment of stock during drought and natural resource management benefits for farmers.

2.123 To the extent that primary producers are currently depreciating fencing over its effective life, this change would assist farmers with their cash flow, so they will have more money sooner to invest, spend or pay off debt. This is due to a change in the timing of tax deductions - the tax deduction will be claimed in one year rather than up to 30 years. There is a timing change, but the overall size of tax deductions over time remains the same.

2.124 Farmers may bring forward the timing of future capital expenditure on fencing to benefit from the accelerated depreciation, as well as invest in more fencing given the shorter period to recoup their costs. Financial institutions may be more willing to lend farmers money to invest in fencing given farmers' increased profitability and ability to repay any loans.

2.125 Suppliers of fencing and other rural businesses will benefit from increased business. However, there may be limited numbers of fencing businesses in regional areas. As they will be faced with increased demand, prices of fences could rise and they may have some difficulty finding additional, trained staff to keep up with increased demand. This risk may be lower to the extent that some farmers are currently claiming capital expenditure on fencing as a repair deduction.

2.126 However, if the new arrangements are ongoing, it would enable primary producers to spread their expenditure over time, give suppliers time to import additional fencing or fencing components and time to hire and train more labour and hence reduce immediate price impacts.

2.127 There will also be a revenue cost for the Government, however the revenue cost for this proposal has not been identified as it is considered part of a package.

Compliance burden estimate:

(Note: the dollar amounts below have been rounded to the nearest whole number)

2.128 ATO data has been used to estimate the number of taxpayers affected by the change to the depreciation treatment of fencing assets.

2.129 It is estimated that there are approximately 183,000 entities with a primary production code on their tax return. A relatively small proportion of these (around 11 per cent) are assumed to be affected by this proposal, as the policy would only apply to new expenditure and many primary producers would already have existing infrastructure.

2.130 An estimated 20,000 taxpayers are likely to face a very small education cost - as they need to become aware of the change in tax treatment.

2.131 It is estimated that it will take each taxpayer 1.14 hours to be informed of the change and apply it to their tax records, resulting in a once-off compliance cost of $75 per taxpayer, or for 20,000 taxpayers, a total implementation cost of $1,492,260.

2.132 In the following years, taxpayers will have reduced compliance costs due to not having to keep records of their fencing assets for tax purposes. Currently fencing assets are depreciated over up to 30 years, depending upon the type of fencing.

2.133 Taxpayers are estimated to save 0.7 hours in record keeping per year. This equals a total compliance saving of $46 per taxpayer, or a total ongoing saving to taxpayers of $916,300.

2.134 Combining the implementation cost and the ongoing compliance benefit, this option has an estimated compliance benefit of $767,074 on an annualised basis.

Table 2.3 : Regulatory burden and cost offset estimate table
Average annual regulatory costs (from business as usual)
Change in costs ($ million) Business Community Organisations Individuals Total change in cost
Total, by sector -$0.8 - - -$0.8
Cost offset ($ million) Business Community organisations Individuals Total, by source
Agency - - - -
Are all new costs offset?
¨ Yes, costs are offset     ¨ No, costs are not offset   Deregulatory-no offsets required
Total (Change in costs - Cost offset) ($ million) = -$0.8

Option 5: Start date of 1 July 2016

2.135 Implementing options 2, 3 and 4, all with a start date of 1 July 2016 would give taxpayers sufficient time to become aware of the changes. However, investment may be delayed until 1 July 2016, as primary producers hold off expenditure unless it is essential. This would not help primary producers manage and mitigate the risks of drought now.

2.136 This could have a negative impact on businesses in regional areas, for example, businesses that primarily build fences or manufacture silos. These businesses may have limited demand for their services until 1 July 2016, especially as the change to the depreciation arrangements is significant. This would reduce their profitability and may reduce their demand for contractors and labour. Some businesses and contractors could become unviable, with flow on implications for rural communities and other businesses.

2.137 With a start date of 1 July 2016, the total implementation cost of options 2, 3 and 4 is $2,722,222. Total ongoing savings are $1,683,986 per year.

2.138 Averaged over 10 years, this results in a total compliance benefit of approximately $1.4 million on an annual basis. An offset is not required because the measure is deregulatory.

Table 2.4 : Regulatory burden and cost offset estimate table
Average annual regulatory costs (from business as usual)
Change in costs ($ million) Business Community Organisations Individuals Total change in cost
Total, by sector -$1.4 - - -$1.4
Cost offset ($ million) Business Community organisations Individuals Total, by source
Agency - - - -
Are all new costs offset?
¨ Yes, costs are offset     ¨ No, costs are not offset   Deregulatory-no offsets required
Total (Change in costs - Cost offset) ($ million) = -$1.4

2.139 This would assist farmers with their cash flow, so they will have more money sooner to invest, spend or pay off debt. This is due to a change in the timing of tax deductions - the tax deductions will be claimed in the first year (for fencing and water facilities) and over three years (for fodder storage assets) rather than up to 50 years (for fodder storage assets). There is a timing change, but the overall size of tax deductions over time remains the same.

2.140 After 1 July 2016, suppliers of water facilities, fodder storage assets and fencing will benefit from increased business. However, there may be limited numbers of suppliers of water facilities, fodder storage assets and fencing in regional areas. As these businesses will be faced with increased demand, prices of these assets could rise and suppliers may have some difficulty finding additional, trained staff to keep up with increased demand. As this option doesn't begin until 1 July 2016, businesses would have some time to adjust and perhaps consider hiring additional staff.

2.141 There will also be a revenue cost for the Government of $70 million over the forward estimates.

Option 6: Start date of 12 May 2015

2.142 Implement options 2, 3 and 4, all with a start date of 7:30pm (AEST) 12 May 2015 - Budget night. Starting the new treatment from Budget would ensure that there are no delays in investment - primary producers will be encouraged to invest to manage and mitigate drought risks now and have no incentive to delay investment. This would include all primary producers, not just those who are small businesses and therefore qualify for the small business accelerated depreciation concessions.

2.143 This option may reduce the negative impacts regional businesses and communities could face if the proposal is delayed.

2.144 The total compliance impact is the same as option 5 above - a compliance saving of $1.4 million per year.

Table 2.5 : Regulatory burden and cost offset estimate table
Average annual regulatory costs (from business as usual)
Change in costs ($ million) Business Community Organisations Individuals Total change in cost
Total, by sector -$1.4 - - -$1.4
Cost offset ($ million) Business Community organisations Individuals Total, by source
Agency - - - -
Are all new costs offset?
¨ Yes, costs are offset     ¨ No, costs are not offset   Deregulatory-no offsets required
Total (Change in costs - Cost offset) ($ million) = -$1.4

2.145 This would assist farmers with their cash flow, so they will have more money sooner to invest, spend or pay off debt. This is due to a change in the timing of tax deductions - the tax deductions will be claimed in the first year (for fencing and water facilities) and over three years (for fodder storage assets) rather than up to 50 years (for fodder storage assets). There is a timing change, but the overall size of tax deductions over time remains the same.

2.146 Suppliers of water facilities, fodder storage assets and fencing will benefit from increased business. However, there may be limited numbers of suppliers of water facilities, fodder storage assets and fencing in regional areas. As these businesses will be faced with increased demand, prices of these assets could rise and they may have some difficulty finding additional, trained staff to keep up with increased demand. This could particularly be a problem for this option as there is no time available for businesses to adjust before the new treatment starts.

2.147 There will be a revenue cost for the Government of $142 million over the forward estimates period.

Consultation

2.148 These proposals have been informed by targeted consultation with tax specialists outside government, including representatives of the Board of Taxation (the Board) and the National Farmers' Federation, on an in-confidence basis.

2.149 The limited consultation on the proposals reflects the cabinet-in-confidence nature of the decision making process. However, it should be noted that the proposed options were informed by extensive consultations undertaken as part of the ACWP.

2.150 Stakeholder engagement on the ACWP has been extensive. Two public consultation processes were run (following the release of the issues paper and Green Paper respectively) involving over 1,000 people and receiving over 1,000 submissions.

2.151 The National Farmers' Federation stated that accelerated depreciation 'will encourage risk mitigation investment, make it more affordable - particularly in 'years of strength', encouraging farm businesses to re-invest in the business when they have the opportunity and ability.'

2.152 They also stated that 'allowing accelerated depreciation will enhance the uptake of new and improved technology and encourage innovation.'

2.153 Since the Budget announcement of accelerated depreciation for primary producers, stakeholders have expressed their support for the introduction of the regime. The proposal has been welcomed by farmers across Australia, noting that assistance will create expenditure in regional communities but have expressed concerns about the arrangements not being currently available[9].

2.154 Comments on the exposure draft from the Board of Taxation representative and the National Farmers' Federation were positive. A minor query was raised about whether the repair of fencing is included in the new treatment. Repairs are included, and this has been incorporated into the draft legislation and explanatory material.

Option selection / Conclusion

2.155 The preferred option is to implement accelerated depreciation for water facilities, fodder storage assets and fencing from 12 May 2015 (Option 6).

2.156 Considering the significant role farmers play in our economy, it is important they are provided with support and encouragement to better manage their risks and prepare for extreme weather events, such as drought, and to provide them with a better tax system.

2.157 Feedback from the National Farmers' Federation helped to decide on the earlier start date, so as not to delay important investment. For example, in their media release of 15 May 2015, they expressed support for the measure but asked for it to start at 'the earliest possible moment'.

2.158 Delaying until 1 July 2016 or the finalisation of the Tax White Paper could have a negative impact on businesses in regional areas, for example, businesses that primarily build fences or construct and install steel silos.

2.159 To provide all farmers with a more simplified tax system and the support needed to effectively manage drought, it is important that accelerated depreciation for water facilities, fodder storage assets and fencing are implemented as one proposal from 12 May 2015. This will ensure that farmers will not be disadvantaged by the proposal due to the type of primary production activities; the maximum number of farmers should be impacted, as intended by the proposal. For example, a farmer who does not have a need to store animal feed would not benefit from the fodder storage asset component if it is implemented alone instead of the water facilities and fencing components.

2.160 Although there may be some impact on regional suppliers of fencing, water facilities and fodder storage assets, there will be positive impacts on taxpayers in terms of reduced record keeping. Farmers will no longer need to keep track of expenditure over extended periods of time, will have more cash in their pockets to spend, invest or pay off debt and boost farm productivity. In addition primary producers will be likely to be more prepared for drought.

Implementation and evaluation / review

2.161 Legislation is required to implement accelerated depreciation for primary producers. The measure will be included in a Winter T Bill, and is expected to be introduced in the week beginning Monday 25 May 2015.

2.162 The design of the legislation is relatively straightforward, largely relying on current models in the tax system. For example, the legislation already contains special treatment for water facilities for primary producers - they can currently be depreciated over three years. Therefore it will be relatively simple to adjust this for write off in the first year.

2.163 The ATO would be responsible for administering the tax rules applying to primary producers. The ATO and Treasury are experienced in implementing this type of reform.

2.164 There is a small chance that unintended consequences may arise from this proposal. Fodder storage assets, for example, would typically include sheds used to store hay and grain for feeding animals. A taxpayer may decide to purchase a new shed for the main purpose of storing machinery and farm equipment. Despite this not being for storing fodder, they may try to claim a tax deduction for the cost of the shed over the three years.

2.165 A similar situation may arise in relation to fencing assets, where a farmer may attempt to claim a tax deduction for a fence which does not have the necessary connection with their primary production activities.

2.166 The law will outline the situations whereby a farmer will not be entitled to claim a tax deduction for an asset if it is not used primarily and principally for the intended purpose. The Explanatory Memorandum includes examples of the types of assets likely to be eligible. These risks could be further minimised through ATO compliance activities and education.

2.167 Given the proposal is ongoing, the ATO will monitor compliance of primary producers with the new arrangements and any unintended behavioural responses from the measures. The ATO will advise Treasury if any problems arise so that remedial action can be considered if necessary. In addition, if required the ATO may consider providing guidance material to clarify the depreciation treatment, for example, taxation rulings or interpretative advice.

2.168 This proposal is part of the ACWP which includes a range of measures to help farmers manage through and recover from drought. Hence, any broader evaluation of that package will also provide an opportunity to assess the merits of this proposal.

Index

Schedule 1: Accelerated depreciation for small business entities

Bill reference Paragraph number
Items 1 to 8, note 3 at the end of subsection 328-175(10), notes at the end of subsections 328-180(1) to (3), note at the end of subsection 328-210(1), notes at the end of subsections 328-250(1) and (4), and note at the end of subsection 328-253(4) 1.40
Item 9, paragraphs 328-180(4)(a) and (b) of the Income Tax (Transitional Provisions) Act°1997 1.14
Item 9, subsection 328-180(5) of the Income Tax (Transitional Provisions) Act 1997 1.20
Item 9, paragraphs 328-180(5)(a) and (b) of the Income Tax (Transitional Provisions) Act 1997 1.22
Item 9, subsection 328-180(6) of the Income Tax (Transitional Provisions) Act 1997 1.24, 1.25
Item 9, subsections 328-180(1) and (2) of the Income Tax (Transitional Provisions) Act 1997 1.32
Item 9, subsections 328­180(1) and (3) of the Income Tax (Transitional Provisions) Act 1997 1.34
Item 9, subsection 328-180(4) of the Income Tax (Transitional Provisions) Act 1997 1.12
Items 10 to 14, note 3 at the end of subsection 328-175(10), notes at the end of subsections 328-180(1) to (3), note at the end of subsection 328-210(1), notes at the end of subsections 328-250(1) and (4), and note at the end of subsection 328-253(4) 1.41

Schedule 2: Accelerated depreciation for primary producers

Bill reference Paragraph number
Items 1, 2, 4 and 20, sections 12-5, 40-10, 40-510 and 995-1 2.51
Item 3, section 40-53 2.19, 2.42
Items 5, 6, 15 and 17, sections 40-515, 40-530 and 40-548 2.20
Items 5, 6, 15 and 17, sections 40-530 and 40-551 2.44
Items 7 and 19, sections 40-515 and 40-555 2.47
Item 7, section 40-515 2.24
Items 8 to 10, section 40-515 2.45
Items 8 to 10, subsection 40-515(4) 2.22
Items 11 and 12, section 40-520 2.16, 2.40
Item 13 , subsections 40-525(1) and (2) (paragraph (a) of the note) 2.34
Item 14, section 40-525 2.15, 2.39
Item 16, section 40-540 2.30
Item 17, section 40-548 2.13
Item 17 section 40-551 2.38
Item 18, subsection 40-555(1) 2.33
Item 19, section 40-555 2.25
Item 21 2.52


ANZ job advertisement series,
http://www.media.anz.com/phoenix.zhtml?c=248677&p=irol-jobad&nyo=0.


2014-15 Budget Paper 1 page 2-11.


ABS, 5625.0, December Quarter 2014.


The Economic Trends, Challenges and Behaviour of Small Businesses in Australia, Reserve Bank of Australia, 2014.


ABS, Cat 8155.0, Australian Industry.


Ibid 4.



http://www.liberal.org.au/latest-news/2013/08/19/tony-abbott-coalitions-policy-jobs-and-growth-small-business.


Maher, S (2015), "Cockies await which way Coalition will fly on white paper", the Australian, 19 May 2015.



http://www.afr.com/news/politics/federal-budget-2015-farmers-say-tax-breaks-may-come-too-late-20150513-gh0ejw.


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