House of Representatives

New Business Tax System (Simplified Tax System) Bill 2000

Second Reading Speech

Mr HOCKEY (North Sydney - Minister for Financial Services and Regulation)

I move:

That the bill be now read a second time.

This bill inserts a new division in the Income Tax Assessment Act 1997 to introduce the simplified tax system (STS).

The simplified tax system is an optional package for small businesses. It will deliver a number of benefits, reducing the time and money that participating small businesses need to spend on bookkeeping and income tax compliance, as well as retaining their access to generous rates of depreciation.

The simplified tax system is based on the recommendations of the Ralph Review of Business Taxation. Consistent with those recommendations, most businesses with an average annual turnover of less than $1 million will be eligible to join.

The simplified tax system has three key elements.

The first element is cash accounting. Under this method of calculating taxable income, businesses will, in general, recognise income when it is received and deductions when expenses are paid.

The second element is simplified depreciation. Assets costing less than $1,000 are immediately deductible. Assets costing $1,000 or more and with effective lives of less than 25 years are pooled and written off at 30 per cent per year. Assets costing $1,000 or more and with effective lives of 25 years or more are pooled and written off at five per cent per year. The use of pools removes the need to keep detailed asset schedules.

The third element is simplified trading stock. Under the trading stock provisions, simplified tax system taxpayers will no longer have to account for changes in trading stock of less than $5,000.

The bill also incorporates a new 12-month rule for determining deductions in respect of prepaid expenditure for simplified tax system taxpayers and individual taxpayers incurring deductible non-business expenditure.

Small business taxpayers who do not enter the simplified tax system and non-individuals who incur deductible non-business expenditure will apportion their prepayment deductions over the eligible service period. These taxpayers will have access to transitional provisions to phase in this apportionment of deductions over the period to 2002-03.

The simplified tax system and prepayments measures included in this bill will apply to assessments for income years commencing on or after 1 July 2001.

The government has been consulting with small business representatives since its announcement of the simplified tax system on 21 September 1999. The government released the exposure draft legislation for the STS in October this year for public comment.

As a result of further consultation and submissions received in response to the exposure draft legislation for the simplified tax system, the government has decided to improve certain provisions of the simplified tax system bill including:

increasing the depreciating assets threshold for eligible businesses from $2 million to $3 million;
removing the requirement to account for the change in value of trading stock on a cash basis; and
relaxing the control tests to avoid inadvertent grouping.

The government considers that the consultations with small business representatives have been a very positive and important part of the development of the simplified tax system. I would like to thank those involved in that extensive process for their efforts.

The government will soon be releasing for public comment the exposure draft legislation for the uniform capital allowances system, which also starts from 1 July 2001. It will contain some concepts and definitions used in the simplified tax system.

Full details of the measures in the New Business Tax System (Simplified Tax System) Bill 2000 are provided in the explanatory memorandum, which I commend to the House-it is an excellent read. I commend the bill.

Debate (on motion by Mr Stephen Smith) adjourned.