House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Small Business, the Hon Michael McCormack MP)

Glossary

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

General outline and financial impact

Extending accelerated depreciation for small business entities

Schedule 1 to this Bill amends the tax law to extend by 12 months to 30 June 2018 the period during which small business entities can access expanded accelerated depreciation rules. This extension provides a boost to small business activity and investment for another year.

Date of effect : This measure applies from 1 July 2017.

Proposal announced : This measure was announced by the Treasurer on 9 May 2017 as part of the 2017-18 Budget.

Financial impact : This measure is estimated to have the following revenue impact over the forward estimates period:

- nil

.. not zero, but rounded to zero

Human rights implications : This Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights, paragraphs 1.27 to 1.31.

Compliance cost impact : There is an estimated total average annual regulatory saving for businesses associated with this measure of $2.4 million.

Summary of regulation impact statement

Regulation impact on business

Main points :

•

Small businesses contribute in many ways to the Australian economy, but they often deal with various operational challenges including cash flow problems and disproportionately higher compliance burdens.

•

Extending accelerated depreciation for small business entities for an extra 12 months will continue to stimulate small business investment and growth by providing cash flow benefits and reducing red tape.

•

This measure is expected to result in a small overall compliance saving.

Chapter 1 - Extending accelerated depreciation for small business entities

Outline of chapter

1.1 Schedule 1 to this Bill amends the accelerated depreciation rules for small business entities to extend by 12 months to 30 June 2018 the availability of an immediate deduction for depreciating assets, amounts included in the second element of a depreciating asset's cost and general small business pools, where the amount is less than $20,000 rather than $1,000. This will continue to improve cash flow for small businesses, providing a boost to small business activity and investment for another year.

1.2 During this period, the increased threshold continues to be available to all small business entities (including those that previously opted out of the accelerated depreciation rules).

1.3 All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless the contrary is indicated.

Context of amendments

Small business entities

1.4 Division 328 of the ITAA 1997 provides a range of income tax concessions for small business entities, including access to simplified depreciation rules (see Subdivision 328-C). Under section 328-110 an entity is a small business entity for an income year if the entity carries on a business in that year and either:

•

the entity carried on a business in the prior income year and its aggregated turnover was less than a threshold amount; or

•

the aggregated turnover of the entity in the current income year is likely to be less than that threshold.

1.5 In the 2015-16 income year, the threshold was $2 million, while for 2016-17 and later income years it is $10 million.

Accelerated depreciation for small business entities

1.6 The Tax Laws Amendment (Small Business Measures No. 2) Act 2015 amended the tax law to temporarily increase to $20,000 the threshold below which certain depreciating assets, costs relating to depreciating assets and general small business pools can be immediately deducted by small business entities. Prior to these amendments, the temporary increase applied from 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015 until 30 June 2017 with the threshold reverting back to $1,000 from 1 July 2017.

1.7 In the 2017-18 Budget, the Government announced an extension to the application period of the temporarily increased threshold for 12 months until 30 June 2018. This encourages additional capital investment by small businesses through lowering the pre-tax rate of return required to justify new investments for an additional 12 months. Increasing the immediate deduction for capital expenditure 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 the life of businesses.

Summary of new law

1.8 This Bill amends the accelerated depreciation rules for small businesses to extend by 12 months to 30 June 2018 the availability of an immediate deduction for depreciating assets, amounts included in the second element of a depreciating asset's cost and general small business pools, where the amount is less than $20,000.

1.9 This Bill ensures that during this period, the $20,000 threshold continues to be available to all small business entities (including those that previously opted out of the accelerated depreciation rules).

Comparison of key features of new law and current law

Detailed explanation of new law

1.10 The period is extended for which the temporary $20,000 threshold applies for the cost of depreciating assets, costs incurred in relation to a depreciating asset included in the second element of a depreciating asset's cost base, and the low pool value deduction under the small business entity capital allowance provisions.

1.11 The temporary threshold now ceases to be available after 30 June 2018 rather than 30 June 2017. The threshold returns to $1,000 from 1 July 2018.

Deductions for depreciating assets

1.12 A small business entity that has elected to use the small business entity capital allowance rules in Subdivision 328-C for an income year may immediately deduct or 'write off' the taxable purpose proportion of the cost of an asset acquired for less than a threshold amount.

1.13 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 the threshold is claimed in the income year in which the asset was first used or installed ready for use.

1.14 This threshold is generally $1,000. However, prior to these amendments a higher $20,000 threshold applied for 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.

1.15 The amendments extend the period to which the increased threshold applies. It now applies 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 2018. [Schedule 1, item 10, paragraph 328-180(4)(b) of the Income Tax (Transitional Provisions) Act 1997]

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

1.16 A small business entity can also immediately 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:

•

less than the threshold;

•

the first such amount to be deducted in respect of the asset; and

•

the asset was written off (its cost was fully deducted) in a previous income year.

1.17 Consistent with the changes to the threshold for writing off depreciating assets, this threshold is generally $1,000. However, prior to these amendments a higher $20,000 threshold applied for costs 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.

1.18 The amendments extend the period in which the increased threshold applies. It now applies to amounts included in the second element of the asset's cost during the period commencing 7.30 pm, legal time in the Australian Capital Territory on 12 May 2015 and ending on 30 June 2018. [Schedule 1, item 11, paragraph 328-180(5)(b) of the Income Tax (Transitional Provisions) Act 1997]

Deductions for low pool values

1.19 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 a threshold amount. For this purpose, the balance of the pool is determined prior to calculating any deductions in respect of the pool for the income year.

1.20 This threshold is generally $1,000. However, prior to these amendments a higher $20,000 threshold applied to income years that end 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.

1.21 The amendments extend the period in which the increased threshold applies. It now applies to income years that end 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 2018. [Schedule 1, item 9, the definition of increased access year in subsection 328-180(1) of the Income Tax (Transitional Provisions) Act 1997]

Five year 'lock-out' rule

1.22 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 the entity satisfies 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. This restriction commences from the first of the later years 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.

1.23 Prior to these amendments, the operation of the lock-out rule was modified for income years that ended on or after 12 May 2015 but on or before 30 June 2017 (referred to as 'increased access years'). Small business entities did not need to apply the lock-out rule to these years. Further, when determining whether the lock-out rule applies in years after the increased access years, all income years prior to the last increased access year are disregarded.

1.24 The amendments extend the period for which the operation of the lock-out rule is modified. The modifications now apply for income years that end on or after 12 May 2015 but on or before 30 June 2018. For most small business entities, this results in one further increased access year. [Schedule 1, item 9, the definition of increased access year in subsection 328-180(1) of the Income Tax (Transitional Provisions) Act 1997]

Consequential amendments

1.25 A number of consequential amendments are made to the ITAA 1997 and the Income Tax (Transitional Provisions) Act 1997 to update relevant guidance material to reflect the amendments made by Schedule 1 to this Bill. [Schedule 1, items 1 to 8, the notes to paragraphs 328-180(1)(b), (2)(a) and (3)(a), note 2 to subsection 328-210(1) and the notes to subsections 328-250(1), (4) and 328-253(4) of the ITAA 1997 and the heading to section 328-180 of the Income Tax (Transitional Provisions) Act 1997].

1.26 The Bill also makes consequential amendments to the Tax Laws Amendment (Small Business Measures No. 2) Act 2015 so that the provisions relating to the temporary threshold will no longer be automatically repealed. This ensures that the provisions are not repealed while they still have operative effect due to the one year extension made by Schedule 1 to this Bill. [Schedule 1, items 12 and 13, items 3 and 4 in the table in subsection 2(1) and Part 2 of Schedule 1 to the Tax Laws Amendment (Small Business Measures No. 2) Act 2015]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) Bill 2017

1.27 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

1.28 This Bill amends the accelerated depreciation rules for small businesses to extend by 12 months to 30 June 2018 the availability of an immediate deduction for depreciating assets, amounts included in the second element of a depreciating asset's cost and general small business pools, where the amount is less than a threshold of $20,000. This will continue to improve cash flow for small businesses, providing a boost to small business activity and investment for another year.

1.29 During this period, the $20,000 threshold continues to be available to all small business entities (including those that previously opted out of the accelerated depreciation rules).

Human rights implications

1.30 This Bill does not engage any of the applicable rights or freedoms.

Conclusion

1.31 This Bill is compatible with human rights as it does not raise any human rights issues.

Chapter 2 - Regulation impact statement

Proposal: Extending the immediate deductibility threshold for small businesses

Assessment of the regulatory impacts

1. What is the problem you are trying to solve?

2.1 There are over 3 million small businesses in Australia. These small businesses contribute in many ways to the Australian economy - the small business sector contributes to national growth and competitiveness. Small businesses are also adaptable and flexible and they can respond quickly to changing circumstances. According to the Australian Bureau of Statistics, small businesses added around $380 billion to the Australian economy in 2014-15.

2.2 Small businesses, however, face a unique set of operational challenges in the economy. This can be illustrated by the typically higher failure rates for small businesses compared with larger companies. Small businesses tend to be more vulnerable to cash flow problems than their larger counterparts because their profitability tends to be more volatile and they have lower levels of retained earnings. It is also not unusual for small businesses to have to manage a disproportionately higher compliance burden, per unit of turnover, than larger businesses.

2.3 Small businesses currently have access to a range of tax concessions - in particular, small businesses are able to fully and immediately deduct each eligible depreciating business asset they purchase costing less than $20,000 ("the immediate deductibility threshold"). The $20,000 threshold was the result of the 2015-16 Budget. It has been in place since 12 May 2015 and expires on 30 June 2017. This encourages small businesses to invest in new assets and replace old and out-dated equipment.

2.4 The ability to immediately deduct assets below $20,000 is available to small businesses with turnover less than $2 million. Businesses with turnover between $2 million and $10 million gain access to the concession from 1 July 2016 under the Enterprise Tax Plan legislation. Around 90,000 additional businesses gain access to the concession.

2.5 The immediate deductibility threshold of $20,000 for small businesses will expire and revert back to $1,000 on 1 July 2017, unless there is government intervention.

2. Why is government action needed?

2.6 There is a clear role for government to create the right policy settings for Australian small businesses. The Government's objective with this proposal is to continue to stimulate small business investment and growth by providing cash flow benefits and reducing red tape for small businesses.

2.7 Australian small businesses are the engine room of our economy, making up 99 per cent of all businesses and contributing $380 billion to the economy. A strong small business sector means more jobs for Australians and more opportunities to build vibrant local communities across the country.

3. What policy options are you considering?

Option 1: No policy change (revert to $1,000 immediate deductibility threshold from 1 July 2017)

2.8 Under this option, there would be no new action taken by the Government and current rules regarding the immediate deductibility threshold (for assets costing less than $20,000) would cease on 30 June 2017. Small businesses would go back to only being able to claim an immediate tax deduction for asset purchases that cost less than $1,000 from 1 July 2017.

Option 2: Extending the immediate deductibility threshold until 30 June 2018 at the current $20,000 threshold (preferred option)

2.9 This option would extend the $20,000 immediate deductibility threshold for small businesses for an extra 12 months until 30 June 2018.

2.10 Small businesses would be able to immediately deduct purchases of eligible assets costing less than $20,000 first used or installed ready for use by 30 June 2018. Assets valued at $20,000 or more (which cannot be immediately deducted) would continue to be placed into the small business simplified depreciation pool and depreciated at 15 per cent in the first income year and 30 per cent each income year thereafter. The pool could also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).

Option 3: Extending the immediate deductibility threshold until 30 June 2018 but decreasing it from $20,000 to $15,000

2.11 This option would extend the immediate deductibility measure for a further 12 months but decrease the threshold so that it applies to eligible assets each costing less than $15,000 (not $20,000). Eligible assets valued at $15,000 or more (which could not be immediately deducted) could be placed into the small business simplified depreciation pool and depreciated at the same rates as outlined above under Option 2. The pool could also be immediately deducted if the balance is less than $15,000 over this period (including existing pools).

4. What is the likely net benefit of each option?

Option 1: No policy change (revert to $1,000 immediate deductibility threshold from 1 July 2017)

2.12 Under this option, the current immediate deductibility threshold will expire and revert back to $1,000 from 1 July 2017.

Benefits

2.13 The benefit of this option is that there would not be a revenue impact over the forward estimates.

Costs

2.14 The cost of this option, however, is that it would not stimulate small business investment and growth, given that there would be no additional cash flow benefits, and it would not reduce red tape for small business.

Option 1 - Net outcome

2.15 While there would not be a cost to revenue over the forward estimates, small business would not be able to access the additional cash flow benefits and red tape savings.

Option 2: Extending the current immediate deductibility threshold until 30 June 2018 at the current $20,000 threshold (preferred option)

2.16 Under this option, the $20,000 immediate deductibility threshold for small businesses would be extended for an extra 12 months until 30 June 2018.

Benefits

2.17 Currently, small businesses are able to immediately deduct the cost of asset purchases that are valued at less than $20,000. Under the Enterprise Tax Plan legislation, around 90,000 additional businesses gain access to the concession.

2.18 Extending the immediate deductibility threshold until 30 June 2018 promotes small business investment and growth by providing additional cash flow benefits and reducing red tape for small business.

2.19 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 cash flow impact is also generally greater for new small businesses, as large capital expenditures often occur early in the life cycle of a business.

2.20 Immediate deductibility generally improves cash flow for small businesses by allowing an immediate deduction for the entire cost of an asset costing less than $20,000 in the year that cost is incurred, rather than deducting a proportion of the cost over a number of years under the ordinary depreciation rules. In most instances, this reduces the tax bill of small businesses in the current income year, improving cash flow and therefore allowing them to use the extra funds to reinvest in their business.

2.21 There will also continue to be a compliance cost saving for small businesses through not needing to maintain a depreciation schedule for assets costing less than $20,000. 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. There will also be less complex record-keeping for assets costing $20,000 or more placed in the pool. This will result in an estimated total average annual regulatory saving for businesses of $2.4 million (see Table 1).

Costs

2.22 This option will not increase compliance costs. In fact, compared to the status quo, there will be a decrease in overall compliance costs because it is an existing measure and there are no new requirements associated with the extension for 12 months.

2.23 Even for the approximately 90,000 additional businesses that gain access to the concession under the Enterprise Tax Plan legislation, it is expected that these companies would have already incurred their implementation compliance costs when planning their taxation affairs for the 2016-17 financial year. These costs were taken into account in the context of the Regulation Impact Statement for the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016.

2.24 This can be balanced with the financial cost. Extending the measure for an additional 12 months is estimated to have a net cost to revenue of $650 million over the forward estimates.

Option 2 - Net benefit

2.25 The net result is that the significant benefits of improved cash flow for small businesses and reduced red tape outweigh the revenue costs associated with this option.

Table 1: Regulatory burden estimate (RBE) table (Option 2)

*Average annual impact (calculated over 10 years).

Option 3: Extending the immediate deductibility threshold until 30 June 2018 but decreasing it from $20,000 to $15,000

2.26 This option would extend the immediate deductibility threshold from 1 July 2017 until 30 June 2018 but decrease the threshold to $15,000.

Benefits

2.27 This option would provide small businesses with similar cash flow benefits as Option 2 but only in relation to assets costing less than $15,000.

2.28 This option would also reduce compliance costs for small businesses but to a lesser extent than Option 2 (see discussion below).

Costs

2.29 This option would result in a small decrease in compliance costs, resulting in an estimated total average annual regulatory saving for businesses of $0.2 million (see Table 2). Small businesses would need to understand and adjust to the change in the new $15,000 immediate deductibility threshold which adds to the compliance burden of this option.

2.30 Small businesses would not be able to access the benefits of immediate deductibility for assets costing between $15,000 and $20,000.

2.31 It would have a lower estimated cost to revenue than a $20,000 immediate deductibility threshold over the forward estimates period.

Option 3 - Net benefit

2.32 The net result is that the benefits of improved cash flow and reduced red tape for small business outweigh the costs associated with this option but to a lesser extent than in Option 2.

Table 2: Regulatory burden estimate (RBE) table (Option 3)

*Average annual impact (calculated over 10 years).

5. Who will you consult about these options and how will you consult them?

2.33 The current $20,000 immediate deductibility threshold was introduced in the 2015-16 Budget following extensive stakeholder consultation including with the Board of Taxation, the Australian Taxation Office (ATO), small business stakeholder groups and professional tax and accounting bodies.

2.34 Stakeholders have provided regular feedback on the effectiveness of the measure. There is strong stakeholder support for extending the immediate deductibility threshold.

6. What is the best option from those you have considered?

2.35 Taking into account the various benefits associated with this proposal, the preferred policy option is to extend the existing $20,000 immediate deductibility threshold for small business for an additional year until 30 June 2018 (Option 2).

7. How will you implement and evaluate your chosen option?

2.36 Legislation is required to implement this proposal. Implementation is expected to be straight-forward, as it is a continuation of an existing measure.

2.37 The ATO has responsibility for administering the legislation. Treasury and the ATO will continue to work together to implement the preferred option.

2.38 Evaluation of this proposal is ongoing. Feedback from stakeholders will continue to be assessed on a regular basis.