GST concessions for business in the 2007-08 Budget

Bernard Pulle
Economics Section

Introduction

The most significant change to the GST base since its introduction from 1 July 2000 was the 2007-08 Budget announcement to increase, with effect from 1 July 2007, the GST registration threshold for businesses from $50,000 to $75,000 and the GST registration threshold for non-profit bodies from $100,000 to $150,000.

This section of the Budget Brief 2007–08 will outline the GST concessions made to business generally and to small business in particular as indicated in Budget Measures 2007–08, Budget Paper No. 2.[1]

As all the GST revenue collected by the Commonwealth is distributed to the States and Territories, the budget measures affecting the GST revenue are indicated in Federal Financial Relations, Budget Paper No. 3 in accordance with Commonwealth Budget practice followed since the introduction of the GST from 1 July 2000.[2]

The Treasurer in Press Release No. 038 of 8 May 2007 titled Simpler Tax for Small Business indicated that the 2007 budget measures in relation to small business were directed at assisting some two million small businesses, that is around 95 percent of all Australian businesses, by reducing red tape and compliance costs.[3]

Background to proposed changes

On 12 October 2005, the Prime Minister and the Treasurer in a Joint Press Release announced the appointment of a Taskforce headed by Mr Gary Banks to identify practical options for alleviating the compliance burden on business from Commonwealth Government regulation.[4]

The report of the Taskforce titled Rethinking Regulation: Report of the Taskforce on Reducing Regulatory Burdens on Business (the report of the Banks Taskforce) was released on 7 April 2006.[5]

The background to most of the 2007 Budget measures relating to the concessions for small business may be traced to the Banks Taskforce report and the Australian Government’s final response to its recommendations.[6]

Increasing the GST registration threshold

The Treasurer in Press Release No. 038 indicated that the turnover threshold for registration of businesses for the GST will increase from $50,000 to $75,000 from 1 July 2007. The threshold for non-profit bodies will increase from $100,000 to $150,000. Entities that register for the GST, even though they are below the proposed thresholds will have the option of remitting GST only once a year.

The Treasurer added that both thresholds will be higher in real terms than when the GST was introduced in July 2000. This measure is in accordance with Recommendation 5.38 of the report of the Banks Taskforce (page 119).

This measure involves a change to the GST base and requires the unanimous agreement of the States under section 11 of the

A New Tax System (Commonwealth-State Financial Arrangements) Act 1999. This measure is expected to reduce GST revenue payable to the States and Territories by $318 million over four years as follows:[7]

 

Table 1: Reduction in GST Payable due to increasing the GST registration threshold

 

2007–08

 

 

2008–09

 

 

2009–10

 

 

2010–11

 

 

Australian Taxation Office ($m)

-56.7

-82.9

-87.1

-91.4

Source: Budget Paper No.3

In consequence, a larger number of small businesses and non-profit bodies will be able to opt out of the GST system. Budget Paper No. 2 (page 16) sets out the impact of this measure as follows:

Those that voluntarily register for GST will have the option of remitting GST annually, rather than quarterly or monthly.

Taxpayers choosing not to register for GST will be able to claim, against their business income, the GST-inclusive cost of deductible business expenses, rather than the GST-exclusive amount. They will not be able to claim fuel tax credits.[8]

Thus, there will be reduced compliance costs to entities, with annual turnover of between the present and proposed GST registration thresholds, which might choose not to register for the GST.

There will also be a reduction in income tax revenues to the Commonwealth as the additional taxable entities choosing not to register for the GST, will be able to claim the GST inclusive costs of deductible business expenses for income tax purposes. The impact on revenue is reflected in Budget Paper No. 2 (page 16) as follows:

Table 2: Reduction in income tax revenue due to non-registration of taxable entities

 

 

 

2007–08

 

 

2008–09

 

 

2009–10

 

 

2010–11

 

 

Australian Taxation Office ($m)

-0.7

-4.7

-4.4

-4.0

Source: Budget Paper No.2

There will be a consequential reduction in administration costs to the Australian Taxation Office (ATO) which may be expected to deal with a smaller number of GST registrants and Business Activity Statement (BAS) returns. The impact on ATO administration costs is reflected in Budget Paper No. 2 (page 16) as follows.

Table 3: Reduction in administration costs for ATO

 

 

 

2007–08

 

 

2008–09

 

 

2009–10

 

 

2010–11

 

 

Australian Taxation Office ($m)

-0.9

-0.9

-0.9

-1.0

Source: Budget Paper No.2

Increasing the threshold for requiring an approved tax invoice for GST

At present businesses are allowed to claim input tax credits for purchases with a GST-exclusive value of $50 or less without the need for an approved tax invoice. The threshold of $50 will be increased to $75 with effect from 1 July 2007. This measure will reduce compliance costs to businesses but may have adverse consequences for GST revenue as well as income tax collections.

Appendix C of Budget Paper No. 3 (page 46) shows the following impact on GST collections which will be borne by the States and Territories:

Table 4: Additional costs of collecting GST borne by States and Territories

 

 

 

2007–08

 

 

2008–09

 

 

2009–10

 

 

2010–11

 

 

Australian Taxation Office ($m)

-0.9

-1.1

-1.2

-1.3

Source: Budget Paper No.3

There will be a negative impact on income tax collections because the ‘no-ABN withholding’ arrangements threshold will also increase from $50 to $75. Budget Paper No. 2 (page 17) estimates the cost to revenue as follows:

Table 5: Reduction in income tax collections due to increase in ‘no-ABN withholding arrangement threshold

 

 

 

2007–08

 

 

2008–09

 

 

2009–10

 

 

2010–11

 

 

Australian Taxation Office ($m)

-2.8

-3.6

-3.8

-4.0

Source: Budget Paper No.2

This measure which affects the GST base will also be subject to the approval of all the States. This measure implements the broad suggestion at page 114 in the Banks Taskforce report that tax thresholds should be reviewed periodically. 

PAYG instalments paid annually when voluntarily registered for GST

Entities that are not required to be registered for GST (turnover less than $75,000 for businesses and $150,000 for non-profit bodies as proposed) but voluntarily register, will have the option of remitting GST annually as indicated in section 3 above.

At present, taxpayers may remit PAYG annually if they are not registered for the GST and meet other eligibility criteria. To align the PAYG and GST payment and reporting it is proposed that from 1 July 2008 those entities who voluntarily register for the GST will be permitted to remit PAYG and GST at the same time annually, lodging only one BAS. This measure will result in reducing compliance costs for these entities.

The costs to the Commonwealth of accepting PAYG instalments annually instead of monthly or quarterly is set out on page 17 of Budget Paper No. 2 as follows:

Table 6: Cost to Commonwealth of change to annual PAYG instalments

 

 

 

2007–08

 

 

2008–09

 

 

2009–10

 

 

2010–11

 

 

Australian Taxation Office ($m)

-

-100.0

-20.0

-20.0

Source: Budget Paper No.2

The impact of this measure, which has already received the approval of the States, on GST collections is set out on page 47 of

Appendix C

to Budget Paper No. 3 as follows:

Table 7: Reduction in GST collected due to change to annual PAYG instalments

 

 

 

2007–08

 

 

2008–09

 

 

2009–10

 

 

2010–11

 

 

Australian Taxation Office ($m)

-35.0

-5.0

-5.0

Source: Budget Paper No.3

One of the four principles set out in the Banks Taskforce report at pages 111 and 112 for developing future tax changes is that measures to protect the revenue base must balance the revenue risk against the cost of compliance. This concessionary measure appears to have been guided by this principle.

Simplified accounting methods for GST—extending availability

The Banks Taskforce Report on page 118 highlighted the compliance problems faced by small businesses such as restaurants and grocers with mixed GST inputs.  The report records that research commissioned by the National Association of Retail Grocers of Australia found that GST compliance costs as a percentage of GST collected were 28.25%, 13.53% and 1.25% for small, medium and large retail grocers respectively. To ease the compliance burden for small restaurants, cafes and caterers the Banks Taskforce in Recommendation 5.37 on page 118 recommended that they should have access to a simplified accounting method.

The measure in Budget Paper No. 2 on page 22 titled Simplified accounting methods —extending availability will give the Commissioner of Taxation power to develop simplified accounting methods (SAMs) for all entities with an annual turnover of less than $2 million that have mixed supplies – taxable and GST free or mixed purchases. This measure will take effect from 1 July 2007. The cost to the ATO of administering this measure is as follows as stated at page 22 of Budget Paper No. 2.

Table 8: Cost to ATO of administering simplified accounting methods

 

 

 

2007–08

 

 

2008–09

 

 

2009–10

 

 

2010–11

 

 

Australian Taxation Office ($m)

-

1.0

1.0

1.0

Source: Budget Paper No.3

Concluding comments

The GST tax concessions (such as increasing the registration threshold from $50,000 to $75,000, increasing the threshold for tax invoices from $50 to $75, and extending the simplified accounting system) proposed in the 2007–08 Budget will assist business generally and micro businesses in particular in reducing compliance costs.

The Treasurer in the Press Release titled Simpler Tax for Small Business whilst referring to the above budget measures in relation to the GST also indicated that it was proposed to implement a small business framework.  This will include measures to standardize the eligibility criteria for accessing small business concessions for GST, the simplified tax system (STS), capital gains tax (CGT), fringe benefits tax (FBT) and PAYG instalments. Any business with turnover of less than $2 million will, subject to other terms applicable to each concession, be able to access any of these concessions. The details of the small business framework were set out in a Joint Press Release titled Making Tax Compliance Easier for Small Business — The New Small Business Framework issued by the Treasurer and the Minister for Small Business and Tourism on 13 November 2006.[9]

The Tax Laws Amendment (Small Business) Bill 2007 was introduced into the House of Representatives on 10 May 2007 to implement the new small business framework.[10] 

 

The Australian Government has on page 306 of Budget Paper No. 2 indicated that it will spend $40 million over four years on a New Business Intensive Assistance Programme. This measure is to enable the ATO to conduct face-to-face and telephone visits to assist new businesses that prepare their own BAS. It is intended to address the problem that access to tax professionals may be too costly for some new micro businesses and the shortage of tax practitioners.

While all these measures appear to offer relief to small businesses, some tax practitioners have reservations whether they will go far enough to reduce the compliance burden of the very small businesses. These businesses carry an undue cost of the GST collection burden as indicated in section 6 above.

Mr Peter Moltoni, the President of the Taxation Institute of Australia (TIA) in a commentary titled - Budget 2007- 08: Is everyone a winner? -   posted on 8 May 2007 on the TIA website, summed up the twin concerns of small business and tax professionals on the adequacy of the measures to give real relief to small business as follows:

“Despite these wins the Taxation Institute is concerned that the Government has only been selective about reducing the complexity of our tax laws” said Mr Moltoni.

“It is clear small business is likely to suffer in the future, as the 2007–08 Budget will deliver increased compliance costs coupled with a lack of qualified tax accountants.

This situation is exacerbated by the reduction of Government funding of accounting and business courses which will result in increased HECS for students in this area and will discourage them from pursuing an accounting career, therefore, impacting upon the entire tax profession in the future.

Additionally, the use of offsets for delivering the tax cuts further entrenches complexity in the system, thereby making future tax rate simplification more problematic.

Despite our compliance cost concerns, we acknowledge that individuals and some small business will benefit from proposals to simplify GST compliance and the PAYG for small business.”

An example of the TIA’s concerns on the increasing complexity and uncertainty of tax law is provided by the history of the tax legislation relating to the consolidation regime. The consolidated regime has been operational from 1 July 2002 and was intended to simplify and ease compliance costs for wholly owned groups by taxing them as single entities. The ATO website lists 16 Acts that have either introduced or amended aspects of the consolidated regime since 1 July 2002.[11]

On budget night, the Minister for Revenue and Assistant Treasurer issued a press release titled Improving the income tax law for consolidated groups indicating further amendments in 15 areas of the consolidation regime, some of which will be retrospective from 1 July 2002.[12]

The TIA’s concern of increasing tax law complexity is illustrated by the example of the consolidated regime and its complexities and this is only a segment of tax law.[13]

Endnotes


 

 [1].    Budget Measures 2007–08, Budget Paper No. 2.

[2].    Federal Financial Relations 2007–08, Budget Paper No. 3, summary of GST measures in Table 3, p.7 and details in Appendix C, pp. 43-48.

[3].    The Hon. Peter Costello MP, Simpler Tax for Small Business, Press Release No. 038, Parliament House, Canberra, 8 May 2002.

[4].    The Hon. John Howard, MP, the Prime Minister and the Hon. Peter Costello, MP, the Treasurer, Taskforce on reducing the regulatory burden on business, Joint Press Release, Parliament House, Canberra, 12 October 2005.

[5].    Regulation Taskforce 2006, Rethinking Regulation: Report of the Taskforce on Reducing Regulatory Burdens on Business, Report to the Prime Minister and the Treasurer, Canberra, January 2006.

[6].    Australian Government, Rethinking Regulation: Report of the Taskforce on Reducing Regulatory Burdens on Business, Australian Government’s Response, (final response), 15 August 2006.

[7].    Federal Financial Relations 2007–08, Budget Paper No. 3, p. 8 and Table 3 in Appendix C at p. 45 In this connection, please refer to page 309 of Budget Paper No. 2 on the  arrangements between the Australian Government and the States to compensate the States for the cost of the decision to allow certain small businesses and non-profit organisations to pay their GST liability on an annual rather than monthly or quarterly basis.

[8].    Budget Measures 2007–08, Budget Paper No. 2,  p. 16, and section 11 of the A New Tax System (Commonwealth-State Financial Arrangements) Act 1999, p. 16.

[9].    The Hon. Peter Costello MP and the Hon. Fran Bailey MP, Making Tax Compliance Easier for Small Business — The New Small Business Framework, Joint Press Release, 13 November 2006.

[10].   Please refer to pages 6 to 8 of the Explanatory Memorandum  to the Tax Laws Amendment (Small Business) Bill 2007 for a summary of the new law.

[11].   The Australian Taxation Office, Consolidation: legislation and supporting material, 14 May 2007.

[12].   The Hon. Peter Dutton, MP, the Minister for Revenue and Assistant Treasurer, Press Release No. 050, Parliament House, Canberra, 8 May 2007.

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