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Senate

Treasury Laws Amendment (Increasing the Instant Asset Write-Off for Small Business Entities) Bill 2019

Supplementary Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)
Amendments to be moved on behalf of the Government

Glossary

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

Abbreviation Definition
Bill Treasury Laws Amendment (Increasing the Instant Asset Write-Off for Small Business Entities) Bill 2019
ITAA 1997 Income Tax Assessment Act 1997
ITTP 1997 Income Tax (Transitional Provisions) Act 1997

General outline and financial impact

Amendments to Treasury Laws Amendment (Increasing the Instant Asset Write-Off for Small Business Entities) Bill 2019

The amendments to the Bill:

increase the threshold below which small business entities can access an immediate deduction for depreciating assets and certain related expenditure (instant asset write-off) from $25,000 to $30,000; and
enable businesses with aggregated turnover of $10 million or more but less than $50 million to access instant asset write-off for depreciating assets and certain related expenditure costing less than $30,000.

The amendments to the Bill complement the existing instant asset write-off. The instant asset write-off is currently available until 30 June 2019, and the Bill extends its operation until 30 June 2020.

Date of effect: The amendments apply from 7.30pm by legal time in the Australian Capital Territory on 2 April 2019.

Proposal announced: The amendments were announced on 2 April 2019 in the 2019-20 Budget and implement the measure, 'Increasing and expanding access to the instant asset write-off'.

Financial impact: The amendments are estimated to result in a reduction in revenue of $400 million over the forward estimates period comprising:

2018-19 2019-20 2020-21 2021-22 2022-23
- -$200m -$500m $50m $250m

- Nil

Human rights implications: The amendments do not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 2, paragraphs 2.1 to 2.6.

Compliance cost impact: The amendments are estimated to result in annual regulatory savings for affected businesses.

Chapter 1 Amendments to Treasury Laws Amendment (Increasing the Instant Asset Write-Off for Small Business Entities) Bill 2019

Outline of chapter

1.1 The amendments to the Bill:

increase the threshold below which small business entities can access an immediate deduction for depreciating assets and certain related expenditure (instant asset write-off) from $25,000 to $30,000; and
enable businesses with aggregated turnover of $10 million or more but less than $50 million to access instant asset write-off for depreciating assets and certain related expenditure costing less than $30,000.

1.2 The amendments to the Bill complement the existing instant asset write-off for small business entities, providing a boost to small and medium sized business activity and investment. The instant asset write-off is currently available until 30 June 2019, and the Bill extends its operation until 30 June 2020.

1.3 The amendments apply from 7.30 pm by legal time in the Australian Capital Territory on 2 April 2019 until 30 June 2020.

1.4 All legislative references are to the ITAA 1997 unless the contrary is indicated.

Context of amendments

Small business entities

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

carried on a business in the prior income year and its aggregated turnover for that year 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.

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

1.7 In determining if an entity is a small business entity, the entity is not subject to the carrying on a business requirement if it is winding up a business in an income year, provided that the entity was a small business entity for the most recent income year in which that business was carried on. Similarly, a partner in a partnership is not taken to carry on business in their capacity as a partner when working out if an entity is a small business entity.

1.8 An entity cannot be a small business entity for an income year because of its expected turnover if it has carried on business in the two previous income years and its aggregated turnover for each of those years was $10 million or more.

Accelerated depreciation for small business entities

1.9 The instant asset write-off is a feature of the small business simplified depreciation rules in Subdivision 328-D. Small business entities may choose to use the small business entity capital allowance rules in Subdivision 328-D for an income year.

1.10 The Tax Laws Amendment (Small Business Measures No. 2) Act 2015 amended the tax law to temporarily increase the instant asset write-off threshold to $20,000, below which:

the cost of certain depreciating assets;
certain amounts included in the second element of a depreciating asset's cost such as amounts spent on improving or transporting a depreciating asset; and
general small business pools;

can be immediately deducted by small business entities.

1.11 The temporary increase applied under the Tax Laws Amendment (Small Business Measures No. 2) Act 2015 from 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015 until 30 June 2017. The threshold was to revert back to $1,000 from 1 July 2017.

1.12 However, the temporary increase was subsequently extended to the 2017-18 and 2018-19 income years. Following these extensions, the threshold was to revert back to $1,000 from 1 July 2019.

1.13 The Bill would amend the tax law to:

extend by 12 months to 30 June 2020 the period during which small business entities can access expanded accelerated depreciation rules (instant asset write-off); and
increase the instant asset write-off threshold from $20,000 to $25,000 from the day the measure was announced - 29 January 2019 - until 30 June 2020 (inclusive).

Accelerated depreciation for other entities

1.14 Entities other than small businesses are not generally able to immediately deduct the costs of acquiring depreciating assets. Instead, they can usually only deduct the decline in value of the asset over its effective life, claiming deductions for an income year equal to that decline in value.

1.15 The decline in value is usually determined using methods set out in Division 40 of the ITAA 1997. Division 40 also contains a number of specific rules for particular expenditures and assets that modify this general treatment.

1.16 A small number of exceptions permit entities holding certain kinds of assets or carrying on certain activities to immediately deduct an amount in respect of certain assets.

1.17 One such exception is subsection 40-80(2), which broadly permits entities to immediately deduct the cost of an asset acquired for $300 or less if the asset is predominantly used for the purpose of producing assessable income other than in the course of carrying on a business and the asset is not part of a set of assets or group of substantially identical assets the cost of which exceeds $300.

Summary of new law

1.18 The amendments to the Bill:

increase the threshold below which small business entities can access an immediate deduction for depreciating assets and certain related expenditure (instant asset write-off) from $25,000 to $30,000; and
enable businesses with aggregated turnover of $10 million or more but less than $50 million in an income year to access instant asset write-off for depreciating assets first used or installed ready for use in that income year and certain related expenditure costing less than $30,000 incurred in that income year until 30 June 2020.

1.19 The amendments apply from 7.30 pm legal time in the Australian Capital Territory on 2 April 2019 until 30 June 2020 to provide a boost to business activity and investment.

Detailed explanation of new law

Increasing the cost of assets that can be immediately deducted by small business entities

1.20 The amendments increase the threshold below which a small business entity, that has elected to use the small business entity capital allowance rules in Subdivision 328-D for an income year can immediately deduct or 'write-off' the taxable purpose proportion of the adjustable value of an asset (the instant asset write-off threshold). These amendments provide a further boost to small business activity and investment.

1.21 As a result of the amendments, the threshold is increased from $25,000 to $30,000 for assets first used or installed ready for use during the period between 7.30 pm by legal time in the Australian Capital Territory on 2 April 2019 (referred to as the 2019 budget time) and 30 June 2020. [Amendments 10 to 12]

1.22 This increase is in addition to the increase in the instant asset threshold from $20,000 to $25,000 provided for in the Bill.

Deductions for amounts included in the second element of cost base

1.23 As part of the changes to the instant asset write-off threshold, the amendments also increase from $25,000 to $30,000 the threshold below which amounts that are included in the second element of an asset's cost (effectively subsequent capital expenditure relating to an asset) can be immediately deducted. This increase applies to amounts included in the second element of the asset's cost during the period on or after 7.30 pm by legal time in the Australian Capital Territory on 2 April 2019 but before 1 July 2020. [Amendments 13 to 15]

Deductions for low pool values

1.24 As the final part of the changes to the instant asset write-off threshold, the amendments increase the threshold below which an entity can immediately deduct the balance of its general small business pool at the end of an income year from $25,000 to $30,000 and extend the period in which the increased threshold applies. The increased threshold applies to income years that end on or after 2 April 2019 but before 1 July 2020. [Amendments 16 and 17]

Immediate deductibility for medium sized business

What can be deducted

1.25 The amendments to the Bill insert an additional Schedule to the Bill to provide a special method for working out the decline in value of a depreciating asset for the income year in which the asset is first used or installed ready for use for a taxable purpose that applies if:

the entity is an eligible entity (that is, carries on a medium sized business - see below) for the income year and the income year in which they first held the asset;
the asset was first acquired in the period commencing at 7.30 pm on 2 April 2019 by legal time in the Australian Capital Territory and before 1 July 2020;
the income year ends on or after 2 April 2019 but before 1 July 2020; and
the cost of the asset is less than $30,000.

[Amendment 18, Schedule 2, item 2, subsection 40-82(1)]

1.26 This means that this special method applies for assets costing less than $30,000 that are both first acquired and first used or installed ready for use by an eligible entity in carrying on a business between 7.30 pm by legal time in the Australian Capital Territory on 2 April 2019 and 30 June 2020.

1.27 Another special method also applies to determine the decline in value of an asset in an income year if:

an amount is included in the second element of the cost of the asset during the income year (this means that, broadly, the entity incurs capital expenditure relating to the asset);
the first such amount included was less than $30,000;
the entity is an eligible entity (that is, it carries on a medium sized business - see below) for the income year;
the decline in value of the asset was worked out using the first special method in a previous income year (ie. the instant asset write-off applied); and
the income year ends between 2 April 2019 and 30 June 2020.

[Amendment 18, Schedule 2, item 2, subsection 40-82(3)]

1.28 If the first special method (for assets first used or installed for a taxable purpose in the income year) applies, the decline in value of the asset is:

for the income year in which the entity first used the asset or installed it ready for use for any taxable purpose (the first year)-its cost (which includes related capital expenditure) at the end of that year; or
for any other income year-the sum of the asset's opening adjustable value for the year and any amount included in the second element of its cost for that year.

[Amendment 18, Schedule 2, item 2, subsection 40-82(2)]

1.29 If the second special method (for assets to which the instant asset write-off previous applied) applies, the decline in value of the asset is equal to the first amount included in the second element of the asset's cost in the income year, which must be less than $30,000. [Amendment 18, Schedule 2, item 2, subsection 40-82(3)]

1.30 As section 40-25 permits entities to deduct the decline in value of an asset during an income year, the effect of the amendments is to permit an eligible entity to immediately deduct assets with a cost of less than $30,000 that are acquired and put to use or held ready for use for a taxable purpose (broadly, generating income - see subsection 40-25(7)) after Budget night 2019.

1.31 Further, should an entity work out the decline in value of an asset using the first special method set out in these rules, then the entity, if it remains eligible, can also immediately deduct the first amount that is included in the second element of the asset's cost in a subsequent income year that ends before 1 July 2020, provided this amount is less than $30,000.

1.32 Together, these changes effectively give eligible medium sized entities access to substantially the same outcomes as the instant asset write-off for small business entities. However, unlike small business entities, special pooling rules do not apply to the assets and capital expenditure of eligible entities that are not immediately deductible. Instead, the decline in value of other assets must be worked out under the normal rules in Division 40, while later capital expenditures must be included in the cost of the asset, with the decline in value also worked out under the normal rules in subsequent income years. [Amendment 18, Schedule 2, item 2, subsection 40-82(5)]

1.33 These rules automatically apply instead of the normal methods for working out the decline in value of a depreciating asset in section 40-65 and elsewhere in Subdivision 40-B, and also apply rather than the rules for when assets must be placed in low value pools. This ensures that all medium sized businesses can benefit from immediate deductibility for all eligible assets under the instant asset write-off, even if the entity carrying on the business has previously made use of low value pools. [Amendment 18, Schedule 2, item 3, subsection 40-425(7A)]

1.34 However, these rules do not override specific rules for deductions elsewhere in Division 40 or in the ITAA 1997 more broadly, such as the special rules for horticultural plants in section 40-545.

Which entities are eligible

1.35 An entity only works out the decline in value of depreciating assets using these medium sized entity rules (i.e. accesses the instant asset write-off) in an income year if the entity is not a small business entity for that income year and it meets the following condition. The entity would be a small business entity for that income year if the aggregated turnover threshold to be a small business entity was $50 million rather than $10 million (that is, it is a medium sized business). This avoids the need to effectively duplicate most of the details of the small business entity test in the tax law for the purposes of the medium sized entity definition. [Amendment 18, Schedule 2, item 2, subsection 40-82(4)]

1.36 Broadly, this means an entity will be eligible to access the instant asset write-off if the entity carries on a business during that income year and at least one of the following applies:

the aggregated turnover of the entity for the current income year is $10 million or more (that is, it exceeds the threshold to be a small business) but less than $50 million;
the aggregated turnover of the entity in the prior income year was $10 million or more but less than $50 million; or
at the beginning of the current income year, the aggregated turnover of the entity for the current income year is likely to be $10 million or more but less than $50 million.

1.37 However, an entity is not eligible to access the instant asset write-off on the basis of its likely turnover if it has carried on business in the two previous income years and its aggregated turnover for each of those years was $50 million or more.

1.38 An entity is also not eligible to immediately deduct the cost of assets under these rules for an income year if the entity is a small business entity in that income year (for example, if the entity was a small business entity because of its turnover in the previous income year). This ensures that there is no overlap or conflict between these rules and the rules for small business entities.

1.39 There are also two modifications to how the carrying on a business requirement applies for small business entities. These modifications also apply in an equivalent way under these rules.

1.40 First, for the purposes of these rules, an entity is taken to carry on a business in an income year if the entity is winding up a business in an income year that was carried on in a previous income year and the entity was eligible to access the instant asset write-off in the year in which it ceased carrying on the business (or would have been eligible had that year been 2019-20). [Amendment 18, Schedule 2, item 2, subparagraph 40-82(4)(b)(ii)]

1.41 Second, for the purposes of these rules, a partner in a partnership is treated as not carrying on business in their capacity as a partner and so would not be eligible to access the instant asset write-off unless they carry on a business in another capacity.

1.42 These amendments allow medium sized businesses to access the instant asset write-off based on past turnover or reasonable expectations about turnover in addition to their actual turnover. This provides more certainty to businesses that the instant asset write-off is available for their purchases of assets during an income year as decisions about purchasing assets need to be taken on or before the end of the relevant income year. It also ensures consistency between access to the instant asset write-off for small and medium sized entities.

1.43 Providing medium sized businesses with access to the instant asset write-off encourages additional capital investment by medium sized businesses by lowering the pre-tax rate of return required to justify new investments. Increasing the immediate deduction for capital expenditure improves medium sized businesses' cash flow. Medium sized businesses, like small businesses, tend to be more vulnerable to cash flow problems than larger businesses because their profitability tends to be more volatile and they typically have lower levels of retained earnings. The impact is expected to be bigger for new small and medium sized businesses, as large capital expenditures often occur early in the life of businesses.

Consequential amendments

1.44 The amendments include and update notes and other guidance materials to reflect the substantive changes made by the amendments. [Amendments 1 to 9 and 18]

Chapter 2 Statement of Compatibility with Human Rights

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

Amendments to Treasury Laws Amendment (Increasing the Instant Asset Write-Off for Small Business Entities) Bill 2019

2.1 The amendments to the Bill are 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

2.2 The amendments to the Bill:

increase the threshold below which small business entities can access an immediate deduction for depreciating assets and certain related expenditure (instant asset write-off) from $25,000 to $30,000; and
enable businesses with aggregated turnover of $10 million or more but less than $50 million to access instant asset write-off for depreciating assets and certain related expenditure costing less than $30,000.

2.3 The amendments to the Bill complement the existing instant asset write-off for small business entities. The instant asset write-off is currently available until 30 June 2019, and the Bill extends its operation until 30 June 2020.

2.4 The amendments apply from 7.30 pm by legal time in the Australian Capital Territory on 2 April 2019 until 30 June 2020. They are intended to provide a further boost to business activity and investment.

Human rights implications

2.5 These amendments do not engage any of the applicable rights or freedoms.

Conclusion

2.6 These amendments are compatible with human rights as they do not raise any human rights issues.


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