Bills Digest No. 15 2004-05
Indirect Tax
Legislation Amendment (Small Business Measures) Bill
2004
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer & Copyright Details
Passage History
Indirect Tax
Legislation Amendment (Small Business Measures) Bill
2004
Date Introduced: 24 June 2004
House: House of
Representatives
Portfolio: Treasury
Commencement: On Royal Assent. However, in some cases an election
made under this legislation will take effect from 1 July
2004.
To amend the A New Tax System
(Goods and Services Tax) Act 1999 (the GST Act) to:
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provide small businesses and non-profit organisations that are
voluntarily registered for the GST the option to report and pay GST
on an annual basis,
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allow small businesses to elect to undertake annual
apportionment of input tax credits for acquisitions used partly for
non-business purposes (rather than being required to apportion
credits on a monthly or quarterly basis), and
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remove the requirement for an eligible entity to make an annual
election to pay GST by instalments.
As part of the 2004-05 Federal Budget, the Treasurer announced
changes to small business compliance with the GST, in particular to
the GST reporting and payment arrangements:
Assisting small business
Mr Speaker, a big part of our resilient economy is
our resilient small business. To reduce the compliance burden on
small business, tonight I am announcing measures which will allow
small businesses who are below the registration threshold and
voluntarily registered for GST to report and pay GST annually,
instead of quarterly.
These measures will benefit around 740,000 small
businesses and 30,000 non-profit organisations that are voluntarily
registered and currently pay on a monthly or quarterly basis. As
all GST revenue is paid to the States, their approval of these
changes will be required. The Government will offer to compensate
the States for the revenue deferred in this measure at a cost of
$330 million in 2004-05.(1)
In addition to the above change in GST compliance, small
businesses with an annual turnover of $2 million or less would be
allowed to apportion their private and business use of assets, such
as motor vehicles on an annual basis for GST purposes rather than
on a quarterly or monthly basis.(2) The Treasurer also
announced that businesses that elect to pay their GST through
quarterly instalments would not be required to re-elect in the
following years.(3)
The Bill amends the GST Act to give effect to the GST compliance
changes announced by the Treasurer. A summary of the changes is
discussed in the Main Provisions section. Other recent measures to
reduce compliance costs include the small business tax
simplification changes announced in the 2004-05 Federal Budget and
the Committed to Small Business package.(4)
In a 2001 report, Businesses Views on Red Tape:
Administrative and Regulatory Burdens on Small and Medium-Sized
Enterprises, the OECD, with the assistance of a business
survey by the Australian Chamber of Commerce and Industry (ACCI),
estimated that taxation, employment and environmental regulations
imposed more than $17 billion in compliance costs on small and
medium-sized businesses in Australia in 1998. Of these costs,
employment and taxation regulations accounted for 76 per cent of
the total. The OECD report estimated from the survey that
Australian businesses incurred compliance costs averaging $33 000
annually.(5)
An earlier survey of small business (excluding medium-sized
businesses in the OECD survey) conducted for the Government s Small
Business Deregulation Task Force in 1996 found that on average
small business spent 16 hours a week on administration and
compliance activities. Of this, government paperwork and compliance
accounted for around four hours per week. Taxation matters took up
three hours of these hours and one hour was spent on other
activities. On average, total compliance costs were $7000 a year.
Of this, almost half ($3000) was spent on external
advice.(6)
In addition the Small Business Deregulation Task Force found
that the duplication of information requirements and delays in
processing and approvals contributed to a sense of frustration felt
by small businesses and a loss of business confidence. (See
Time
for Business, Report of the Small Business Deregulation Task
Force.) It defined the regulation and paperwork burden not just in
terms of the financial cost to small business but of lost
opportunities which can result in a less productive economy:
Burden is the additional paperwork and other
activities that small business must complete to comply with
government regulations. It is the time and expense outlaid that is
over and above normal commercial practices. The burden includes
lost opportunities and disincentives to expand.
The progress towards reducing compliance costs for small
business is well documented in the 2003 OECD report, From Red
Tape to Smart Tape: Administrative Simplification. The report
examined administrative simplification in OECD countries and
reviewed in detail the policies in seven countries, including
Australia. The report noted that the reduction of the impact of
regulation on small business has received special attention by all
Australian governments over the last few years, beginning in 1995
with the National Competition Policy (NCP) reviews of legislation
and reforms to the taxation system:
It is clear that the most important and effective
burden reduction programmes in Australia have increasingly been
adopted as part of broader reform initiatives, including the ABN
element of the recent redesign of the tax system and regulatory
quality assurance requirements adopted as part of the
implementation of the national competition
policy.(7)
In dealing with the compliance burden on small business,
governments have focussed on improving the quality of new
regulation. At the Commonwealth level, this work is being done by
the Office of Regulation Review (ORR) which is the Government s
watchdog over the regulation review process.(8) There is
a strong emphasis on small business in the requirements placed on
Commonwealth departments and agencies. The Cabinet-endorsed
Guide to Regulation advises all agencies that:
The Government has asked the ORR to ensure that
particular effects on small businesses of proposed new and amended
legislation and any other regulation are made explicit in the RIS
[Regulation Impact Statement]. The RIS should also give full
consideration to the Government s objective... of minimising the
paperwork and regulatory burden on small business.
Over the last five years about 900 RISs were required for
regulatory proposals affecting business.(9) Of these,
about 750 (or 82 per cent) were assessed by ORR as providing 'an
adequate level of analysis'. Most of these RISs were published as
part of explanatory material to new legislation. The analysis of
the impact of the current Bill on small business is typical of the
analysis provided in the RISs. (See
Explanatory Memorandum, Regulation Impact Statement, Analysis
of costs/benefits.)
The ACCI, which is the peak body representing small business,
has described efforts to reduce the compliance burden as a never
ending battle and called for greater regulatory accountability. It
has proposed a Charter of Mutual Regulatory Responsibility between
policy makers who make new regulation and those who have to work
under the system.(10) Other organisations representing
small business, such as CPA Australia and the Australian Industry
Group have addressed the need for a Small Business Advocate to act
on behalf of small business within government.(11)
In a speech to the Small Business Coalition in Canberra, the
Chairman of the Productivity Commission, Gary Banks, noted that the
burden of regulation fell more heavily on small business not
because they are more heavily regulated but because they have the
least capacity to cope:
Operators or managers of smaller businesses are
less likely to have specialist staff with detailed knowledge of
regulations or taxation matters. Regulations are more likely to be
dealt with by prime decision-makers, distracting them from their
core role. The costs of such managerial diversion are very
difficult to assess, but are potentially large.(12)
Indeed, most small businesses (including non-employing small
businesses which make up almost 50 per cent of the total number of
registered small businesses) do not have the time nor the skills to
sift through legislation and have to pay advisers, for example
accountants, for assistance. CPA Australia estimates that the
compliance burden by small business is at least 35 per cent greater
than for large businesses.(13) The most time consuming
activities for small businesses are information exchanges which
occur when a business starts up, when circumstances change and when
it has to provide periodic reports and returns to government. It is
a view that is confirmed by the Chief Executive of the Council of
Small Business Organisations in Australia (COSBOA):
Opening a bank account, moving a telephone number,
registering a business name, applying for innumerable licences, all
of these take time and cost money and divert business owners from
developing their business and serving their customers... Red tape
impacts disproportionately on small businesses because they do not
have the money or staff to devote solely to compliance tasks. There
is a physical limit to how much compliance a small business can do
and stay afloat.(14)
A number of small business organisations, including the State
Chamber of Commerce (NSW), have undertaken surveys on the small
business compliance burden. Although the surveys do not purport to
measure systematically the cost of compliance as was measured by
the Small Business Deregulation Task Force in 1996, these point to
an increase in the compliance burden faced by small business.
The survey by the State Chamber of Commerce (NSW), which was
undertaken in July 2003, found that small businesses face
proportionately higher compliance costs both in time and resources
than large businesses. (See Red
Tape Register - the Tax Burden.) The survey examined the costs
for businesses in complying with employment (payroll) and tax
related regulation only. Typically, most small and micro businesses
(businesses with less than 5 employees) spend 1 to 2 hours a
fortnight on payroll related paperwork. This is the same amount of
time taken by large businesses with 21 to 99 employees (see chart
below). There is very little relationship between the number of
employees and the time a business spends in calculating its payroll
liability.
A similar conclusion can be drawn for the quarterly GST returns
and associated Business Activity Statement (BAS). The most common
time spent by businesses for BAS statement completion was 5 to 15
hours a quarter. However, 10 per cent of all businesses took 31 to
50 hours or more (that is 4 to 6 days a quarter).
In a survey of businesses in the retail motor industry by the
Victorian Automobile Chamber of Commerce, 86 per cent of
respondents indicated that the compliance burden had increased over
the past five years. (See
Survey of Business Compliance Costs.) There was no marked
difference in the response across the three business categories.
Large businesses with 20 or more employees and small businesses
with 5 to 19 staff reported an increased compliance burden (90.0
per cent and 89.5 per cent respectively), compared with 81.9 per
cent for micro businesses (those with less than 5 employees).
Not surprisingly, the increased compliance burden had fallen
largely on business owners. Of the hours that businesses in general
spend on compliance activities, business owners undertook 59.4 per
cent, employees performed 28.3 per cent and consultants completed
the remaining 12.3 per cent of compliance tasks (see chart
below).
Item 6 of Schedule 1 inserts
Division 151 ─ Annual tax periods into the
GST Act. This Division allows certain entities to have annual tax
periods and to lodge their GST returns and pay their GST on an
annual basis.
Subdivision 151-A (sections 151-5 to 151-25)
sets out the rules and procedures for a small business or
non-profit organisation that is voluntarily registered for the GST
to make an annual tax period election. A registration
threshold will apply and only those entities with an annual
turnover below the threshold ($50 000 for businesses and $100 000
for non-profit organisations) will be eligible to make an annual
tax period election. If an entity is required to be registered for
GST purposes then it cannot make an annual tax period election.
Generally, an election must be made on or before 21 August for
those entities with monthly tax periods, and on or before 28
October for those with quarterly tax periods.
Under section 151-25 an election may be
disallowed by the Commissioner. A decision to disallow is a
reviewable decision under the Taxation Administration Act
1953 (the Administration Act).
Item 11 of Schedule 2 inserts
Division 131 Annual apportionment of creditable
purpose into the GST Act. This Division allows small
businesses to elect to determine their non-enterprise or private
use of acquisitions on an annual basis when claiming input tax
credits, rather than on a quarterly or monthly basis as is
currently the case.
New subdivision 131-A (sections 131-5
to 131-20) sets out the rules and procedures to enable an
entity to make an annual apportionment election. An entity
will be eligible to make an election if its annual turnover does
not exceed the annual apportionment threshold of $2
million and the entity is not subject to either the GST instalment
or annual tax period options. Once a valid annual apportionment
election has been made, it will continue to apply unless the entity
revokes the election.
Under section 131-20 an annual apportionment
election may be disallowed by the Commissioner. A decision to
disallow is a reviewable decision under the Administration Act.
New subdivision 131-B (sections
131-40 to 131-60) deals
with the consequences of an annual apportionment election.
Under section 131-40 where an annual
apportionment election has been made the input tax creditable on an
acquisition that is partly creditable (generally because partly for
business use and partly for non-business use) is equal to the GST
payable on the acquisition.
Section 131-45 makes a corresponding provision
in relation to importations.
In relation to both acquisitions and importations, there is
provision for regulations to be made if the operation of these
provisions gives rise to practices that are inconsistent with the
policy intent.
New sections 131-55 and 131-60
provide that an entity will have an increasing adjustment
where the amount of input tax credit is determined under new
subdivision 131-B and is different to what it
would have been had that subdivision not applied.
Entities that have an annual turnover of $2 million or less and
meet certain other criteria can elect to pay their GST in quarterly
instalments. These entities are currently required to make a new
election each financial year in order to continue paying GST by
instalments. Schedule 3 of the Bill removes this
requirement.
New subsection 162-30(1) provides that once a
GST instalment election has been made, it will continue to apply
unless the entity revokes the election, the Commissioner disallows
the election, the entity s annual turnover exceeds the instalment
turnover threshold or the entity is in a net refund position. A
decision to disallow an election is a reviewable decision under the
Administration Act.
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This change will result in a deferral of GST revenue to the
States and Territories, including $330 million in 2004-05 and
between $16 million to $18 million in subsequent years.
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See Budget Paper No 3, Appendix
A: GST Revenue Measures.
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See Joint Press Release,
Small Business Tax Simplification , Treasurer and Minister for
Small Business and Tourism, 11 May 2004.
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See Joint Press Release,
Small Business Tax Simplification , Treasurer and Minister for
Small Business and Tourism, 11 May 2004; and Media Release,
Reduced Paperwork for Small Business , Minister for Small
Business and Tourism, 6 July 2004.
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The figure is slightly under the OECD average of $36 300.
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See Yellow Pages, Working Overtime - A National Survey of
the Paperwork Burden on Small Business, Background Paper 3,
October 1996.
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OECD, From Red Tape to Smart Tape: Administrative
Simplification in OECD Countries, 2003, p. 105.
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It also has a similar role for COAG in relation to national
regulatory proposals. For its Charter and Functions see Office of Regulation
Review, Charter.
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See Office of Regulation Review,
Regulation and its Review 2002-03, Compliance trends since
1998, pp. xvii-xxi.
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See Australian Chamber of Commerce and Industry,
Threats to Small and Medium sized Enterprises from Tax and other
Regulations, 22 August 2003.
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See Australian Industry Group, Media Release, Small
business need more from both sides , 7 July 2004; and CPA
Australia,
Small Business Policy: where to from here?, Discussion
Paper, pp. 9 10.
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Gary Banks, Reducing
the business costs of regulation, 20 March 2003, p. 5.
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CPA Australia,
Small Business Policy: where to from here?, Discussion
Paper, p. 7.
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AAP, Australian small business buried in red tape:
COSBOA, 20 July 2004.
Michael Priestley and Jennifer Nicholson
2 August 2004
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