Explanatory Memorandum(Circulated by the authority of the Minister for Small Business, the Hon Bruce Billson MP)
The following abbreviations and acronyms are used throughout this explanatory memorandum.
|ITAA 1936||Income Tax Assessment Act 1936|
|ITAA 1997||Income Tax Assessment Act 1997|
|Rates Act||Income Tax Rates Act 1986|
General outline and financial impact
Small business company tax cut
Schedule 1 to the Bill amends the Income Tax Rates Act 1986 to reduce the company tax rate from 30 per cent to 28.5 per cent for companies that are small business entities with an aggregated turnover of less than $2 million.
Date of effect: The amendments apply for the first income year beginning on or after 1 July 2015 and for subsequent income years.
Proposal announced: The measure was announced as part of the 'Jobs and Small Business Package' in the 2015-16 Budget.
Financial impact: In the 2015-16 Budget the measure was estimated to have the following revenue implications:
Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights -paragraphs 1.32 to 1.35.
Compliance cost impact: This measure has been assessed as having a transitional compliance cost of $30 million or $35 per company. A much smaller number of companies close to the large/small business threshold will have an ongoing compliance cost assessed at $35 per company or $200,000 in total.
Summary of regulation impact statement
Regulation impact on business
Impact: The regulatory impact on businesses has been assessed as low.
- Large businesses will be unaffected by this measure with their tax rates and compliance costs remaining the same as at present.
- The vast majority of small businesses will have a transitional cost in amending the tax rate in their tax return procedures but otherwise will have minimal ongoing costs.
- A relatively small number of companies with turnover close to the small business turnover threshold will have minor ongoing costs associated with determining their tax status.
Chapter 1 Small business company tax cut
Outline of chapter
1.1 Schedule 1 to the Bill amends the Income Tax Rates Act 1986 (Rates Act) to reduce the company tax rate from 30 per cent to 28.5 per cent for companies that are small business entities with an aggregated turnover of less than $2 million.
Context of amendments
1.2 Small businesses are a key driver of Australia's economy, underpinning growth and innovation and providing jobs for millions of Australians. As part of the Jobs and Small Business package announced in the 2015-16 Budget, the company tax rate for companies that are small business entities is being reduced to 28.5 per cent. The current maximum franking credit rate for a distribution will remain unchanged at 30 per cent for all other companies.
1.3 Providing small businesses with a reduced rate of company tax will improve small business cash flow and assist them to grow and allow small businesses to compete more effectively with larger businesses.
1.4 Over 90 per cent of incorporated businesses (over 780,000 out of a total of 850,000 incorporated businesses, based on Australian Taxation Office figures from 2012-13) fall under the $2 million turnover threshold and could potentially benefit from this measure.
Summary of new law
1.5 This measure will reduce the company tax rate to 28.5 per cent for companies that are small business entities with an aggregated turnover of less than $2 million, from the income year commencing on or after 1 July 2015.
1.6 For all other companies over the threshold, the company tax rate will remain 30 per cent.
1.7 The maximum franking credit that can be allocated to a frankable distribution will be unchanged so the same rate of 30 per cent will continue to apply to all companies.
Comparison of key features of new law and current law
|New law||Current law|
|The corporate tax rate for small business companies that have an aggregated turnover of less than $2 million is 28.5 per cent.
The corporate tax rate for companies that have an aggregate turnover of more than $2 million is 30 per cent.
The maximum franking credit that can be allocated to a frankable distribution is based on a tax rate of 30 per cent for all companies.
|The corporate tax rate is 30 per cent.
The maximum franking credit that can be allocated to a frankable distribution is based on a tax rate of 30 per cent for all companies.
Detailed explanation of new law
Reduction in the corporate tax rate
1.8 The corporate tax rate is reduced to 28.5 per cent for companies that are small business entities (small business companies) with an aggregated turnover of less than $2 million. [Schedule 1, item 1, paragraph 23(2)(a) of the Rates Act]
1.9 The term 'small business entity' takes its meaning from section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997) and includes the requirement that an entity must have an aggregate turnover of less than $2 million in the previous year and are likely to be under the turnover threshold of $2 million for the current year.
1.10 For all other companies that are not small business entities, the corporate tax rate will remain at 30 per cent. [Schedule 1, item 1, paragraph 23(2)(b) of the Rates Act]
Certain large companies
1.11 For certain types of large companies their corporate tax rate will remain unchanged. These companies include:
- retirement savings account providers;
- authorised deposit-taking institutions;
- first home saver account providers;
- pooled development funds; or
- life insurance companies.
[Schedule 1, item 1, subsection 23(2) of the Rates Act]
Corporate unit trusts and public trading trusts
1.12 Corporate unit trusts and public trading trusts are both public unit trusts that are taxed as corporate tax entities and are currently taxed at the 30 per cent corporate tax rate.
1.13 For corporate unit trusts and public trading trusts that are small business entities, the corporate tax rate will be 28.5 per cent. [Schedule 1, item 3, sections 24 and 25 of the Rates Act]
1.14 Non-profit companies pay no tax on the first $416 of their taxable income. Tax is then shaded in at a rate of 55 per cent of the excess over $416 until the tax on taxable income equals the corporate tax rate. Where the taxable income exceeds the shade in limit, the full taxable income is effectively taxed at the corporate tax rate.
1.15 The shade in limit is currently $915 (reflecting the current 30 per cent corporate tax rate). As the corporate tax rate is being reduced to 28.5 per cent for small business companies, the shade in limit is reduced to $863 for non-profit companies that are small business companies. [Schedule 1, item 2, subsection 23(6) of the Rates Act]
1.16 Therefore, the rates of tax payable by a non-profit company that are small business companies will be as follows:
- first $416 of taxable income-nil;
- taxable income between $416 and $863-55 per cent; and
- taxable income above $863-28.5 per cent.
Medium credit unions
1.17 Credit unions fall into three categories for income tax purposes:
- recognised small credit unions;
- recognised medium credit unions; and
- recognised large credit unions.
1.18 A credit union is a recognised small credit union if, broadly, its notional taxable income is less than $50,000. Recognised small credit unions are exempt from tax on interest derived from loans to members. Other taxable income derived by a recognised small credit union is taxed at the corporate tax rate.
1.19 A credit union is a recognised medium credit union if, broadly, its notional taxable income is between $50,000 and $150,000. A recognised medium credit union is subject to an effective tax rate based on a sliding scale, according to its level of taxable income. The tax payable by a recognised medium credit union (before any offsets or credits) is limited to 45 per cent of the amount by which the credit union's taxable income exceeds $49,999.
1.20 A credit union is a recognised large credit union if, broadly, its notional taxable income is $150,000 or more. The taxable income derived by a recognised large credit union is taxed at the corporate tax rate.
1.21 The 45 per cent rate that applies to the taxable income of recognised medium credit unions reflects the current 30 per cent corporate tax rate. As the corporate tax rate is being reduced to 28.5 per cent for small business companies, this rate is reduced to 42.75 per cent for medium credit unions that are small business companies. [Schedule 1, item 2, subsection 23(7) of the Rates Act]
1.22 A number of consequential amendments are made to various provisions in the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 that refer to a 30 per cent rate to ensure that the appropriate rate is applied for small business companies.
1.23 The term corporate tax rate is used across the tax law to refer to the applicable tax rate that applies to companies.
1.24 The definition is amended to refer to the new tax rate of 28.5 per cent that applies to small business companies as set out in the Rates Act. The definition also refers to the standard corporate tax rate that applies to companies that do not meet the definition of a 'small business entity'. [Schedule 1, item 28, definition of 'corporate tax rate' in subsection 995-1(1) of the ITAA 1997 ()]
1.25 The standard corporate tax rate is then defined to refer to the tax rate of 30 per cent that applies to non-small business companies as set out in the Rates Act. [Schedule 1, item 29, definition of 'standard corporate tax rate' in subsection 995-1(1)of the ITAA 1997]
Maximum franking credit amendments
1.26 The maximum franking credit that can be allocated to a frankable distribution is usually set by the applicable tax rate. In the case of small business companies, the franking credit cap will be set the same as large businesses, that is, as if the small business company were being taxed at the standard corporate tax rate of 30 per cent.
1.27 While small business companies will have a higher franking credit cap than their tax rate, the normal franking credit distribution provisions will apply.
1.28 A number of consequential amendments have been made to the tax law to ensure that the maximum franking credit that can be allocated to frankable distributions will be unchanged and to address any flow-on effects. [Schedule 1, items 8 and 13 to 26]
'Corporate tax gross-up rate'
1.29 The term of corporate tax gross-up rate has been introduced to simplify the formulas applied in respect to the imputation system and to reference the 'standard corporate tax rate' to ensure that the 30 per cent rate remains unchanged. [Schedule 1, item 27, definition of 'corporate tax gross-up rate' in subsection 995-1(1)of the ITAA 1997]
Other consequential amendments
1.30 There are other smaller consequential amendments that:
- ensure that the amount of the rebate allowed under the tax exempt infrastructure borrowing concessions in certain circumstances is calculated based on the corporate tax rate that applies to the entity [Schedule 1, items 4 and 5, paragraphs 159GZZZZG(1)(d), (2)(e), (3)(e) and (4)(e) of the ITAA 1936];
- ensure that when reducing a carried forward tax offset by any unused or net exempt income that the reduction is calculated based on the corporate tax rate that applies to the entity [Schedule 1, items 9, 10 and 11, section 65-30 and subsections 65-35(3) and (3A) of the ITAA 1997];
- update examples which illustrate the operation of the company tax loss rules in certain circumstances to clarify that the company in the example is not a small business entity [Schedule 1, items 6 and 7, the examples in subsections 36-17(5) and 36-55(1) of the ITAA 1997];
- update an example which illustrates the operation of capital gains tax discount rules for shareholders in listed investment companies to clarify that the company in the example is not a small business entity [Schedule 1, item 12, the example in subsection 115-280(3) of the ITAA 1997]; and
- make minor technical changes to accommodate the amendments [Schedule 1, items 30 and 31].
1.31 The amendments apply for the first income year beginning on or after 1 July 2015 and for subsequent income years. [Schedule 1, item 32]
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Small business company tax cut
1.32 This Schedule 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.
1.33 Schedule 1 to the Bill amends the Rates Act to reduce the company tax rate from 30 per cent to 28.5 per cent for companies that are small business entities with an aggregated turnover of less than $2 million.
Human rights implications
1.34 This Schedule does not engage any of the applicable rights or freedoms as it only applies to companies and is simply a rate change.
1.35 This Schedule is compatible with human rights as it does not raise any human rights issues.
Chapter 2 Regulation impact statement - Small business company tax cut
2.1 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.
2.2 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.
2.3 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.
2.4 There have been some positive signs the required adjustment is underway, including job advertisements showing a slight upward trend in recent months.
2.5 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. Investment in the non-mining sectors continues to be subdued, and small businesses have responded by scaling back the level of their capital spending. Longer-term capital expenditure plans have also been revised down significantly in the non-mining sector, notwithstanding solid growth this year.
2.6 The Government committed to introducing a 1.5 per cent small business tax cut from 1 July 2015 in the Coalition's Policy for Small Business. On 2 February the Prime Minister announced a small business and jobs package would be announced in the 2015-16 Budget.
2.7 Incorporated small businesses make an important contribution to the Australian economy. They, along with unincorporated small businesses, account for the vast majority of the active private businesses in the country and represent large shares of its employment and value added.
2.8 There are currently around 780,000 incorporated small businesses or over 30 per cent of the 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. 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.
2.9 However, while small companies 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 National Australia Bank (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.
2.10 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.
2.11 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.
2.12 The tax rates which apply to Australian companies are above the Organisation for Economic Co-operation and Development (OECD) average and may be discouraging investment. The higher a company's tax rate, the less retained earnings the company will have for reinvestment. Reducing tax rates would allow incorporated small businesses to retain more of their earnings, allowing them to invest more and expand their business activity. Modifying the tax system to better encourage new small business investment could enhance productivity over time through capital deepening.
Case for government action / Objective of reform
2.13 While it is businesses which 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, creating more jobs. With the economy facing below-trend growth, the Government's objective is to stimulate small business growth and employment, through reduced tax and regulatory barriers.
2.14 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 businesses are a key driver of Australia's economy, underpinning growth and innovation and providing jobs for millions of Australians.
2.15 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 deliver lower taxes to incorporated small businesses to help them grow.
2.16 Providing incorporated small businesses with a reduced rate of company tax will permit them to retain more earnings for investment. Investment is important as it leads to existing output being produced at a lower cost (capital deepening) 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 higher employment and wages over time. However, given the small size of these companies, the overall macroeconomic impact is unlikely to be as significant compared to a broader tax cut to all companies.
Option 1: No policy change
2.17 Under this option, no new actions would be taken by the Government and existing policy settings would be relied upon.
Option 2: Company tax cut for incorporated small businesses
2.18 The Prime Minister announced at the National Press Club, that 'at the heart of our small business jobs package will be a small business company tax cut on July 1 - at least as big as the 1.5 per cent already flagged' to apply from the start of the 2015-16 financial year.
2.19 Under this option, a company tax cut of 1.5 per cent would be provided to incorporated small businesses (defined as those companies with turnover of less than $2 million) for income years beginning on or after 1 July 2015. This is consistent with the Government's election commitment to provide small business with a 1.5 per cent tax cut, as outlined in the policy document, Coalition's Policy for Small Business.
Cost benefit analysis of each option / Impact analysis
Option 1: No policy change
2.20 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.
2.21 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 to 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: Company tax cut for incorporated small businesses
(a) Company tax rate reduction for small business
2.22 A corporate tax cut targeted to small businesses (defined as incorporated businesses with aggregated turnover less than $2 million) beginning on or after 1 July 2015.
2.23 This proposal would create a two-tier company tax system whereby:
- the whole of a company's taxable income would be subject to a tax rate of 28.5 per cent if its aggregated turnover is below a $2 million threshold; or
- the whole of a company's taxable income would be subject to a 30 per cent rate if its aggregated turnover is equal to or above a $2 million threshold.
2.24 The maximum amount of franking credits a small incorporated business can attach to its dividends in a year - its franking cap - will not be reduced along with the tax rate. The franking cap for small businesses will stay the same as for large businesses.
2.25 Providing incorporated small businesses with a reduced rate of company tax would improve small business cash flow and assist them to grow and to compete more effectively with larger businesses. It is estimated that over 780,000 companies could potentially benefit from this proposal.
2.26 Being a tax-based assistance measure, the financial benefit for individual companies will be proportional to the amount of tax they pay. The benefit will be more significant for eligible companies with higher taxable profits.
2.27 Reduced tax payable by small businesses will allow them to retain more earnings for reinvestment. Investment is important as it leads to existing output being produced at a lower cost (capital deepening) 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 higher employment and wages over time. While a cut in the company tax rate will not immediately benefit the majority of small to medium enterprises that are not operating in a company structure, they are likely to benefit, to some extent, from the economy-wide benefits that flow from the cut. However, given the small size of these companies and average reduction in tax paid, the overall macroeconomic impact is unlikely to be large.
2.28 The benefit of this measure should not be assessed in isolation but considered as part of the small business package. Small businesses may be eligible for more than one of the different proposals, dependent on their level of taxable income or whether they are incorporated or unincorporated.
2.29 Keeping the maximum amount of franking credits a small incorporated business can attach to its dividends in a year the same as large companies while the tax rate decreases means shareholders in dividend paying incorporated small businesses would be better off. Shareholders could receive franking credits in excess of the tax rate applicable to these companies, providing there are enough franking credits in these companies' accounts, (recognising that companies may not fully distribute their taxable income in any year). This would effectively reduce the shareholders' overall tax paid regardless of their marginal tax rate.
2.30 Revenue loss for government in the short term is estimated to be in the order of $1.45 billion over the forward estimates (-$250 million in 2015-16 and -$400 million per annum from 2016-17 to 2018-19). However, the ongoing loss may be reduced in the long term to the extent that higher business earnings and employment as a result of the tax cut increases government revenue.
2.31 Keeping the maximum amount of franking credits a small incorporated business can attach to its dividends in a year the same as large companies comes at a cost to revenue as the Government is providing franking credits in excess of the tax rate applicable to incorporated small businesses. As a result, some shareholders will pay tax at less than their marginal tax rate on dividends.
2.32 It is expected there will be an initial compliance cost for businesses and their accountants/tax advisors/tax agents in learning about and understanding the change, and implementing it into their accounting systems. However, the model is largely based upon the existing company tax system. This one-off adjustment cost is estimated at $35 per company, or $30 million in total.
2.33 A widening of the differential between company and personal tax rates might provide an additional incentive for high income individuals to structure their services through incorporation to get the tax benefit, therefore incur additional compliance costs in doing so. Aggressive tax planning might also lead to subsequent revenue losses. If unincorporated businesses restructured to take advantage of the lower tax rate, they would incur initial costs of incorporation and ongoing costs to satisfy corporations act requirements. This risk may be lowered if a separate proposal to provide assistance to unincorporated businesses is also adopted.
2.34 A company crossing the threshold between the lower and higher tax rates will be subject to an additional tax liability on the taxable income under the threshold that was previously assessed at the lower small company tax rate. This tax 'cliff' could be a disincentive to growth and, while it would not be very large in most circumstances, it adds to the existing disincentives within the system to grow above the small business turnover threshold.
2.35 In addition, businesses that are close to the threshold could attempt to actively delay recognition of income and/or bring forward deductions in order to fall under the small business threshold and be eligible for the lower tax rate. However, such behavioural responses are likely to be uncommon as only a small number of companies would be close to the threshold in a given year. Those companies close to the threshold, estimated at around 5,500 companies, will have some compliance costs associated with determining their tax position which is estimated at $35 per company or $200,000 in total.
2.36 It is expected that the taxpayers and their tax agents will have very minimal ongoing compliance cost because system changes required are expected to be a one-off change.
2.37 Medium and large companies will not incur any costs from the change as their tax outcomes are unchanged.
2.38 The ATO will initially have significant administrative costs in applying the two-tier company tax system, which should decrease over time as issues are settled and system changes are put in place.
- Adjustments to ATO systems may be required.
- The ATO might devote greater efforts to police the boundary (threshold) and relevant integrity rules, but this is limited to a small proportion of taxpayers in the population
2.39 The assessment is that the potential compliance cost impact to be medium overall comprising a medium implementation impact and a low ongoing compliance cost relative to the affected group. The table below gives the dollar costing of these estimates.
|Potential compliance cost impact|
|Implementation costs||On-going costs/(savings)|
|Cost per taxpayer/client direct compliance costs||$35||$35|
|Total potential direct compliance costs||$30,000,000||$200,000|
2.40 The measure is subject to the normal compliance cost offset requirements, which require that any additional compliance costs be fully offset by compliance cost reductions elsewhere. The increased regulatory costs are offset by the regulatory cost reductions associated with a proposal to align the legal frameworks for personal and corporate insolvency practitioners.
|Average annual regulatory costs (from business as usual)|
|Change in costs ($ million)||Business||Community organisations||Individuals||Total change in cost|
|Total, by sector||$3.2||-||-||$3.2|
|Cost offset ($ million)||Business||Community organisations||Individuals||Total, by source|
|Are all new costs offset?
Yes, costs are offset
|Total (Change in costs - Cost offset) ($ million) = $0.0|
2.41 This proposal would potentially benefit over 780,000 small incorporated businesses. However, being a tax-based assistance measure, the benefit will be proportional to the amount of tax a company pays. This measure will benefit tax paying incorporated small businesses by improving their profitability and competitiveness, which ultimately can lead to higher employment and wages over time.
2.42 The tax proposals have been informed by targeted consultation with tax specialists outside government, including the Board of Taxation (the Board), on an in-confidence basis. Descriptions of the tax measures being considered were provided to Board members out-of-session for discussion at the Board's March 2015 meeting. A follow-up teleconference was also held with the small business tax experts of the Board. The purpose of the teleconference was to provide Board members with the opportunity to provide more detailed feedback on the options identified for improving the way that small businesses and their owners are taxed.
2.43 The feedback from the Board was that a tax cut would be warmly received, and would send a positive message that the Government is doing something for small business. The Board questioned whether the suggested amount would make a significant difference to eligible companies as it would have a minimal impact on cash flow. Other issues raised by the Board mostly were around the complexities of applying a small business threshold. The Board recommended a turnover rather than an income test which was adopted.
2.44 The scale and turnover issues were considered in the policy development process. While larger tax cuts would be favoured by industry in isolation, larger tax cuts would have come at the expense of the other small business assistance measures such as accelerated depreciation. High turnover, low margin businesses may criticise a turnover test as it does not take account of profit margin variations, but such a test is robust because it is less exposed to manipulation than an income test.
2.45 The Treasury also consulted with the ATO in order to identify any implementation issues, integrity concerns with the proposals, or any potential flow-on impacts they might have within the broader tax framework.
2.46 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.
2.47 To inform the 2014 Board of Taxation Review into Tax Impediments Facing Small Business, the Board encouraged broad participation by writing directly to stakeholder groups and holding consultations with 48 stakeholder groups as well as further targeted consultations with experts on specific issues. The review recommendations were also informed by the 43 written submissions received. As this was a fast-track review the Board did not issue a discussion paper. The review recommended increasing the small entity tax threshold, increasing the Fringe Benefits Tax minor and infrequent threshold and extending CGT roll-over relief for small business, noting that these issues were commonly raised in the submissions received.
2.48 The Business Tax Working Group (Working Group) was established by the former government following the Tax Forum held in October 2011. The Working Group released a Discussion Paper that sought views from stakeholders and received more than 80 submissions. The Working Group concluded that there would be benefits from a lower company tax rate and that Government should continue to reduce the tax rate as fiscal circumstances permit. This is also consistent with the findings of the Australia's Future Tax System review.
2.49 Since the Budget announcement of the Government's small business package, the Council of Small Business Australia (COSBOA) the peak industry body, expressed its support for the package noting the 'budget inclusions for small business have been designed to boost confidence, boost cash flow and boost the economy'; and that the package 'provides the lowest tax rate for small business since 1967'.
2.50 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 as the legislation is expected to be relatively straightforward as it is essentially a rate change.
6. Option selection / Conclusion
2.51 The preferred option is to provide a company tax cut of 1.5 per cent to incorporated small businesses (defined as those companies with turnover of less than $2 million) for income years beginning on or after 1 July 2015.
2.52 While larger tax cuts would be favoured by industry, larger tax cuts at the expense of the other small business assistance measures is not considered the optimal policy mix.
2.53 The Government must balance the benefits of a tax rate cut against the other forms of industry assistance such as accelerated depreciation. If this measure was introduced in isolation rather than as part of the proposed small business package, the net benefit would be less due to it exacerbating potential distortions to taxpayer behaviour near the turnover threshold. The reduction in net benefit would result from the additional compliance and administrative costs associated with restructuring and aggressive tax planning that some businesses may choose to incur in response to the proposal.
7. Implementation and evaluation / review
2.54 Legislation is required to implement the proposed two-tier company tax system. As the Government has set the start date as 1 July 2015, the small business company tax cut needs to be a Winter T Bill and enacted by 30 June 2015.
2.56 The design of the legislation is expected to be relatively straightforward largely relying on current models in the tax system.
2.57 The ATO would be responsible for administering the tax rules applying to incorporated small businesses. The ATO and Treasury are experienced in implementing this type of reform.
2.58 The benefit of this measure should not be assessed in isolation but considered as part of the small business package. Similarly, the design issues that have the potential to cause difficulty, such as the use of a turnover rather than and income threshold and the tax cliff threshold need to be monitored as part of the total small business regime as these conditions already apply to other benefits received by small businesses. The ATO will monitor compliance of small businesses and unintended behavioural changes resulting from the small business test. It will advise Treasury if any problems are identified so remedial action can be considered, if appropriate.
Schedule 1: Amendments
|Bill reference||Paragraph number|
|Item 1, subsection 23(2) of the Rates Act||1.11|
|Item 1, paragraph 23(2)(a) of the Rates Act||1.8|
|Item 1, paragraph 23(2)(b) of the Rates Act||1.10|
|Item 2, subsection 23(6) of the Rates Act||1.15|
|Item 2, subsection 23(7) of the Rates Act||1.21|
|Item 3, sections 24 and 25 of the Rates Act||1.13|
|Items 4 and 5, paragraphs 159GZZZZG(1)(d), (2)(e), (3)(e) and (4)(e) of the ITAA 1936||1.30|
|Items 6 and 7, the examples in subsections 36-17(5) and 36-55(1) of the ITAA 1997||1.30|
|Items 8 and 13 to 26||1.28|
|Items 9, 10 and 11, section 65-30 and subsections 65-35(3) and (3A) of the ITAA 1997||1.30|
|Item 12, the example in subsection 115-280(3) of the ITAA 1997||1.30|
|Item 27, definition of 'corporate tax gross-up rate' in subsection 995-1(1)of the ITAA 1997||1.29|
|Item 28, definition of 'corporate tax rate' in subsection 995-1(1) of the ITAA 1997 ()||1.24|
|Item 29, definition of 'standard corporate tax rate' in subsection 995-1(1)of the ITAA 1997||1.25|
|Items 30 and 31||1.30|
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
Re:think Tax discussion paper March 2015, page 74,