Bills Digest no. 156 2006–07
Tax Laws Amendment (Small Business) Bill
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
Contact Officer & Copyright Details
Laws Amendment (Small Business) Bill 2007
10 May 2007
House: House of Representatives
The Act commences on Royal
Assent. The commencement and application of the Schedules are dealt
with in the Main provisions section of this Bills
Bill implements the
New Small Business Framework for small business entities
(SBEs). It has eight schedules and the purpose of each is briefly
set out below.
Schedule 1 Small business
The amendments in this Schedule insert
new Subdivision 328-C into the Income Tax
Assessment Act 1997 (ITAA 1997) and provisions to explain the
meaning of small business entity (SBE), annual turnover, aggregated
turnover and related concepts. These are the basic definitions for
the small business framework which the amendments in this Schedule
and some of the other Schedules referred to below establish. It
also makes consequential amendments.
Schedule 2 Amendments relating to GST
This Schedule amends the A New Tax System
(Goods and Services Tax) Act 1999 (the GST Act) relating to
various GST turnover thresholds to enable an SBE to access GST
accounting for GST on a cash basis,
annual apportionment of input tax credits
for acquisitions and importations that are partly creditable,
paying GST by quarterly instalments and
makes consequential amendments.
Schedule 3 STS taxpayers
The amendments in this Schedule establish the
New Small Business Framework in Division 328 of the ITAA 1997 and
to signify the change in substance the title of Division 328 of the
ITAA 1997 is amended from STS taxpayers to
small business entities. The tax concessions that
are available to simplified tax system (STS) taxpayers under
current law, namely, the simplified depreciation regime, the
simplified trading stock regime and the immediate full deduction
for pre-paid expenses, are retained in the concessions under the
small business framework. This Schedule inserts a new guide to
Division 328 which serves as a reference point to all the tax
concessions accessible to SBEs under tax law, subject to additional
Schedule 4 Capital gains tax small
This Schedule amends the ITAA 1997 to increase
from $5 million to $6 million the capital gains maximum net assets
threshold, for a SBE to access CGT concessions.
Schedule 5 Fringe benefits tax: car
At present the small business car parking
exemption is available if the employer has ordinary and statutory
income less than $10 million. Schedule 5 amends
the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)
to enable an employer to get the FBT car parking exemption if the
employer is either a SBE or if the employer has ordinary and
statutory income which is less than $10 million. The other
conditions for eligibility for this exemption remain unchanged.
Schedule 6 PAYG instalments
This Schedule amends the Taxation
Administration Act 1953 (TAA 1953) so that for full assessment
taxpayers the base assessment income threshold is increased from $1
million to $2 million for entitlement to make quarterly PAYG
instalments on the basis of GDP-adjusted notional tax.
Schedule 7 Roll-over relief
This Schedule amends Subdivision 328-D of the
ITAA 1997 to extend roll-over relief available under the uniform
capital allowances system to small business entities who choose to
deduct amounts for depreciating assets under Subdivision 328-D.
Schedule 8 Miscellaneous
This Schedule includes a number of
consequential amendments to tax law arising from the changes from
the STS system to the small business framework.
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.(1) The report of the Taskforce
Rethinking Regulation: Report of the Taskforce on Reducing
Regulatory Burdens on Business (the report of the Banks
Taskforce) was released on 7 April 2006.(2)
Recommendation 5.43 recommended that the
Australian Government should take steps to align and/or rationalise
different definitions in the tax law including small business ,
employee , salary and wages , and associate .
final response to the Banks Taskforce report, the Australian
Government agreed in principle with this
recommendation.(3) The response also referred to the
2006-07 Budget, in which the Australian Government announced a
number of measures designed to improve the tax system for small
businesses by streamlining definitions and reducing complexity and
The measures announced in the 2006-07 Budget
for increasing the tax concessions for small business as well as
easing the compliance burden included the following:
increase the STS annual turnover threshold from
$1 million to $2 million;
remove the $3 million depreciating assets test
from the STS eligibility requirements;
increase the net assets threshold for the CGT
small business concessions from $5 million to $6 million;
allow STS taxpayers to be eligible for the CGT
small business concessions without having to satisfy the net assets
threshold and to pay quarterly PAYG instalments on the basis of
GDP-adjusted notional tax.
On 13 November 2006, the Treasurer and the
Minister for Small Business and Tourism in a Joint Press Release
Making Tax Compliance Easier for Small Business The New Small
Business Framework, announced that the Government will
introduce legislation to standardise the eligibility criteria for
small business tax concessions from 1 July 2007.(5) The
press release indicated that the measures now announced go beyond
the measures in the 2006-07 Budget as follows:
Separate eligibility tests currently exist for
GST, the Simplified Tax System (STS), capital gains tax (CGT),
fringe benefits tax (FBT) and pay-as-you-go (PAYG) small business
As a result of today s announcement, any business with annual
turnover of less than $2 million will be able to access any of
Small businesses will only have to apply one eligibility test to
access a range of small business concessions. This demonstrates
again the Government s commitment to reducing red tape and
compliance costs for small businesses.
This proposal incorporates and goes beyond the package of measures
to assist small businesses announced in this year s Budget.
The 5 different small business tests under the
current structure, shown in the New Small Business Framework,
attached to the above mentioned Press Release, to be replaced by a
single small business test of less than $2 million aggregated
turnover, are as follows:
Test under present
STS Turnover < $1 M
GST Turnover < $1-2 M
Active assets < $5 M
income + Statutory income < $ 10 M
Instalment income < $ 1M
This section of the Bills Digest will consider
the main provisions in the various Schedules which seek to
establish the New Small Business Framework.
Item 1 of Schedule
1 inserts new Subdivision
328-C into the ITAA 1997 to explain the meaning of small
business entity (SBE), annual turnover, aggregated turnover and
related concepts. Generally, an entity is a SBE if it carries on
business and satisfies the $2 million aggregated turnover test.
Briefly, the aggregate of the turnover of an
entity (the test entity), its connected entities and its affiliates
must be less than $2 million in any income year in order that the
test entity may pass the aggregate turnover test in
proposed section 328-110 to qualify as an SBE. In
arriving at the aggregate turnover the turnover attributable to
inter-entity transactions is generally excluded.
The meaning of connected with an entity is
defined in proposed section 328-125. The reader is
referred to paragraphs 2.41 to 2.55 on pages 25 and 29 of the
Explanatory Memorandum for an explanation with examples of this
The meaning of affiliate is defined in
proposed section 328-130. The reader is referred
to paragraphs 2.34 to 2.40 on pages 23 and 24 of the Explanatory
Memorandum for an explanation with examples of when an entity is an
affiliate of another entity.
Proposed section 328-110 sets
out the three ways by which an entity may satisfy the $2 million
aggregated turnover test as indicated below:
the entity s aggregated turnover for the previous income year was
less than $2 million (proposed subparagraph
the entity s aggregated turnover for the current income year is
likely to be less than $2 million, calculated as at the first day
of the income year (proposed subparagraph 328-110(1)(b)
(ii) and proposed paragraph
entity s actual aggregated turnover for the current income year was
less than $2 million as at the end of the income year
(proposed subsection 328-110(4)).
328-110(3) provides that an entity is not an SBE for the
current income year if it carried on business in each of the two
previous income years and the aggregated turnover for each of those
two previous years was $2 million or more.
328-115(1) states that the aggregated turnover for an
income year is the sum of relevant annual turnovers described in
proposed subsection 328-115(2) less the amounts
covered under proposed subsection 328-115(3).
subsection328-115(2) the relevant annual turnovers that
need to be aggregated are:
entity s (the test entity s) annual turnover for the income year,
annual turnover of a relevant entity that is an entity connected
with the test entity, and
annual turnover of a relevant entity that is an affiliate of the
The aggregation of turnovers is required if
the relationship of connected entity and affiliate existed with the
test entity at any time during the income year under
proposed subsection 328-115(2).
It will be noted that a relevant entity for
the purposes of proposed section 328-115 could be
either an entity that is connected with the test entity as defined
in proposed section 328-125 or an affiliate of the
test entity as defined in proposed section
328-115(3) excludes from aggregate annual turnover, the
annual turnover attributable to transactions:
between the test entity and a relevant entity (proposed
between a relevant entity and another relevant entity while each
relevant entity is connected with the test entity or is an
affiliate of the test entity (proposed paragraph
took place by a relevant entity while the relevant entity is not
connected with the test entity or is not an affiliate of the test
entity (proposed paragraph 328-115(3)(c)).
328-120(1) sets out the general rule for determining
annual turnover. It provides that annual turnover for an income
year is the total ordinary income that the entity derives in the
income year in the ordinary course of carrying on a business.
The following exclusions are provided in
proposed section 328-120.
An entity is not required to include amounts
relating to GST when working out the entity s annual turnover
(proposed subsection 328-120(2)).
An entity is not required to include amounts of
ordinary income from the sales of retail fuel in working out annual
turnover (proposed subsection 328-120(3)).
The annual turnover attributable from any
dealings with associates of an entity, which are not at arm s
length, must be accounted for on an arm s length basis under
proposed subsection 328-120(4). The meaning of
associate will under subsection 995-1(1) of the ITAA 1997 is the
meaning given by section 318 of the Income Tax Assessment Act
1936 (ITAA 1936).
328-120(6) provides that regulations may provide for
calculating an entity s annual turnover in a different way, but
only if it would be less than worked out by section 328-120.
The reader is referred to paragraphs 2.7 to
2.39 on pages 19 to 25 of the Explanatory Memorandum for a detailed
explanation of calculating annual turnover and aggregated annual
Item 8 of
Schedule 1 provides that the amendments made by
this Schedule apply in relation to the 2007-08 income year and
later income years.
Item 59 of Schedule
2 updates the Dictionary in subsection 995-1(1) of the
A New Tax System (Goods and Services Tax) Act 1999 (the
GST Act) to define a small business entity (SBE) in terms of the
meaning given in proposed section 328-110 of the
The main provisions which ensure that a SBE
continues to be eligible for the three GST concessions using the
turnover calculations for the SBE test are set out below for each
concession. Proposed section 328-110 inserted by
item 1 of Schedule 1 sets out
three ways of passing the SBE test. One of the ways is based on
aggregated turnover worked out at the end of the current year by
proposed subsection 328-110(4). A note to
proposed subsection 328-110(4) states that an
entity which qualifies to be a SBE under this subsection is not
entitled to the three GST concessions. The Explanatory Memorandum
to the Bill indicates at paragraph 1.36 on page 14 (with an example
on page 15) that as these concessions are applicable during the
course of the income year, it would not be possible to make them
available to an entity whose status as a SBE is not determined
until after the end of that income year.
Hence, the main provision relating to each of
these GST concessions excludes the concession to an entity which is
a SBE because of proposed subsection
Paragraph 29-40(3)(a) of the GST Act provides
that the cash accounting threshold is $1 million. The amendment
proposed by item 12 of Schedule 2
is to change the cash accounting threshold to $2 million.
Item 9 of Schedule 2 repeals
paragraph 29-40(1)(a) and substitutes proposed
paragraph 29-40(1)(a) to enable a SBE to choose
the cash accounting basis. However, an entity which is a SBE
because of proposed subsection 328-110(4) is
excluded from making this election.
Items 22 and
23 of Schedule 2 amend paragraphs
131-5(1)(a) and paragraph 131-20(1)(c) so that a SBE is eligible
for the annual apportionment of input tax credits for acquisitions
and importations that are partly creditable. Here again, an entity
which is a SBE because of proposed subsection
328-110(4) is excluded from making this election.
Section 162-5 of the GST Act provides the
conditions for eligibility to elect to pay GST by instalments.
Item 30 of Schedule 2 substitutes
a new paragraph 162-5(1)(a) to enable an entity
which is a SBE for the income year in which the election is made,
to elect to pay GST in instalments. An entity which is a SBE
because of proposed subsection 328-110(4) is
excluded from making this election.
Item 67(1) of
Schedule 2 provides that the amendments referred
to above apply to net amounts for tax periods starting on or after
1 July 2007.
Item 68, 69
and 70 of Schedule 2 provide
transitional arrangements relating to choice to account on a cash
basis, election to have an annual apportionment and election to pay
GST by instalments, respectively.
Schedule 3 amends Division
328 of the ITAA 1997 by changing its title from STS
taxpayers to small business entities and
inserting a new guide to Division 328. This guide gives a list of
the 12 tax concessions available to an SBE, subject to the existing
specific conditions that apply to each of those concessions. Under
the small business framework the substance of the existing tax
concessions under the STS system will be retained.
In paragraphs 4.34 and 4.35 on pages 46 and 47
Explanatory Memorandum outlines the existing concessions:
4.34 The former
STS concessions available to small business entities under the new
the simplified depreciation regime that allows
for depreciating assets costing less than $1,000 each to be written
off immediately. Most other depreciating assets are pooled and
enjoy an accelerated rate of depreciation;
the simplified trading stock regime that allows
taxpayers not to account for changes in the value of trading stock
or do stocktakes at the end of the income year; and
an immediate full deduction for certain pre-paid
expenses, despite the prepayment rules that potentially apply where
a taxpayer incurs expenditure for something to be done (in whole or
in part) in a later income year. Where these rules apply, the
deduction for the expenditure is spread over the period covered by
those services, up to a maximum of 10 years.
4.35 As was the case with the STS, small
business entities will generally have a two-year amendment period
(instead of four years that applies to taxpayers with more complex
tax affairs) during which the Commissioner can review and amend the
entity s income tax assessment.
Paragraphs 4.31 and 4.32 of the
Explanatory Memorandum on page 46 indicate that amendments are
required to retain the existing STS tax concessions for SBEs and to
give them flexibility to choose the concessions that suit them best
substance of the concessions currently available to STS taxpayers
remains unchanged under the new small business framework.
4.32 However, minor amendments are required to:
small business entities to access the former STS concessions;
abolish the STS as a system, and relabel the STS concessions to
make the terminology consistent with the new small business
provide that small business entities can choose to use only those
concessions that suit their business needs.
The items in Schedule 3 that
bring about these changes are stated in paragraph 4.32 to be
items 1 to 78,
81 to 84, 87 to
96, 110 to 120,
149 to 159 and
162. These include amendments to Division 328 of
the ITAA 1997 and the Income Tax (Transitional Provisions) Act
Item 176 of
Schedule provides that the amendments made by this
Schedule apply in relation to the 2007-08 income year and later
The CGT provisions are being amended to allow
an entity which is an SBE or whose maximum net asset value is less
than $6 million to access the CGT concessions for small
Division 152 of the ITAA 1997 provides CGT
concessions for small business. These are:
the 15 year exemption in Subdivision
the 50% reduction in Subdivision 152-C,
the retirement concession in Subdivision 152-D,
the roll-over in Subdivision 152-E.
Section 152-5 sets out 3 major basic
conditions for a small business to obtain relief under Division
152. Item 2 of Schedule 4 repeals
existing paragraph 152-5(a) which states one of these basic
conditions and substitutes new paragraph 152-5(a)
to provide that for Division 152 to apply:
the entity must be a SBE, or
a partner in a partnership that is a SBE,
the net value of the assets that the entity and
related entities own must not exceed $6 million.
Related amendments are in item
3 of Schedule 4.
The proposed amendments indicate that if an
entity does not satisfy the small business test it can still access
the small business CGT concessions if it satisfies the maximum net
asset value test which has been increased from $5 million to $6
million (items 2,4,
22, 23 and 25 of
The increase in the maximum net asset value
threshold from $5 million to $6 million was announced in the
The amendments referred to above apply to CGT
events happening in the 2007-08 income year and later years of
income under item 31(1) of Schedule
Section 58GA of the FBTAA 1986 provides for
the exemption of small business car parking benefits. Existing
paragraph 58GA(d) provides that this is an exempt benefit if the
employer s ordinary income and statutory income for the year of
income ending most recently before the start of the FBT year is
less than $10 million.
Item 1 of Schedule
5 repeals existing paragraph 58GA(1)(d) and inserts
new paragraph 58GA(1)(d) to allow an employer who
is a SBE for the year of income ending most recently before the
start of the FBT year to also be entitled to this exemption under
proposed subparagraph 58GA(1)(d)(ii). The current
exemption to employers whose total ordinary and statutory income is
less than $10 million will continue under proposed
Item 6 of Schedule
5 provides that the amendments made by this Schedule apply
in relation to the FBT year starting on 1 April 2007 and later FBT
Section 45-130 of Schedule 1 of the
Taxation Administration Act 1953 (TAA 1953) sets out the
conditions to be met by a PAYG full self-assessment taxpayer, to be
a quarterly payer on the basis of GDP adjusted notional tax.
Subparagraph 45-130(1)(b)(ii) requires that
the base assessment instalment income for the base year is $1
million or less. Item 2 of Schedule
6 amends subparagraph 45-130(1)(b)(ii) to change $1million
to $2 million.
Items 4 to 8
and item 9(2) of Schedule 6 will
enable full self-assessment taxpayers who are SBEs to access the
PAYG quarterly payers on the basis of GDP-adjusted notional tax
from the 2009-10 income year and later years.
Under item 9(1) of
Schedule 6, the amendment made by
item 2 enables full self-assessment taxpayers to
access instalments based on GDP-adjusted notional tax from the
2007-08 income year where the base assessment instalment income is
less than $2 million.
The application of item 9(2)
to SBEs to from the 2009-10 and later years has been referred to
Subdivision 328-D of the ITAA 1997 currently
sets out the capital allowances available to STS taxpayers and
section 328-243 deals with roll-over relief. Under the amendments
proposed in this Bill these will now be applicable to SBEs.
On 9 May 2006, in connection with the 2006
Budget, the Treasure in Press
Release No. 039 announced that depreciating asset roll over
relief will also be extended to STS taxpayers to ensure businesses
can be restructured without triggering a taxing point.
Schedule 7 amends Subdivision
328-D of the ITAA 1997 to extend roll-over relief available under
the uniform capital allowances system in Division 40 of the ITAA
1997 to small business entities who choose to deduct amounts for
depreciating assets under Subdivision 328-D.
Item 1 of Schedule
7 inserts proposed subsection 328-243(1A)
to Subdivision 328-D to extend the optional asset roll-over relief
in respect of depreciating assets under subsection 40-340(1) to
Explanatory Memorandum summarises the situations where the
roll-over is available in paragraph 3.12 on page 37 as follows.
a sole trader, trustee or a partnership that
chooses to use the capital allowances for small business entities
disposes of all assets in a small business pool to a wholly-owned
a small business entity that chooses to use the
capital allowances for small business entities disposes of all
assets in the small business to another taxpayer as a result of a
Item 2 of Schedule 7 provides
that the amendment made by this Schedule applies in relation to the
income year after the income year in which this Act receives the
Royal Assent and later years.
The miscellaneous amendments made by
Schedule 8 are consequential to the insertion of
the expression small business entity into the ITAA 1997. The
Explanatory Memorandum in paragraph 4.74 on page 54 offers the
following explanation of the amendments proposed by items
1 to 8:
4.74 There is a definition of small business
taxpayer (and associated definitions) in the ITAA 1997 which only
applies to some transitional rules. These definitions have been
removed to avoid confusion with the new definition of small
business entity . To the extent necessary the definitions are
retained in the Income Tax (Transitional Provisions) Act
Item 9 of Schedule
8 provides that the amendments made by this Schedule apply
in relation to the 2007-08 income year and later income years.
introduces the New Small Business Framework in Division 328 of the
ITAA 1997. Proposed section 328-10 indicates that
if an entity is a SBE for any income year it can choose to take
advantage of the concessions in the table in the proposed section
which is set out below:
However, the availability of each concession
is subject to any additional specific conditions attaching to each
concession being satisfied. This implements the commitment of the
Treasurer and the Minister for Small Business and Tourism in the
Joint Press Release that announced the small business
Small businesses meeting the $2 million annual
turnover test will not need to make any further decisions to enter
into the new arrangements, nor will they be obliged to adopt any
concessions not suited to their requirements. Any business
meeting the new small business definition will be able to choose
those concessions that meet its business needs.(7)
This is an improvement on the STS system where
an entity electing to enter it was locked into the three
concessions without the option to decide on accepting individual
The concessions to small business in this Bill
have been granted at a cost to revenue of $295 million over 4
Source: Explanatory Memorandum
to the Bill, page 3.
Banks Taskforce report at pages 111 and 112 sets out four
principles for developing future tax changes. Principle No. 3 is
that measures to protect the revenue base must balance the revenue
risk against the cost of compliance. The measures in the Bill will
no doubt help reduce red tape and compliance costs to small
businesses and is in keeping with Principle No. 3. The measures in
this Bill also comply with Recommendation 5.43 on page 122 of the
Banks Task Force Report that the Australian Government should take
steps to align and/or rationalise different definitions in tax law
including small businesses .
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.
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.
Australian Government, Rethinking Regulation: Report of the
Taskforce on Reducing Regulatory Burdens on Business,
Australian Government s Response, (final response),
15 August 2006.
Budget Measures 2006-07, Budget
Paper No. 2, pp. 30 and 31.
The Hon Peter Costello, MP, Treasurer and the Hon Fran Bailey,
MP, the Minister for Small Business and Tourism,
Making Tax Compliance Easier for Small Business The New Small
Business Framework, Joint Press Release, Melbourne, 13
The author has drawn extensively from the
Explanatory Memorandum to the Tax Laws Amendment (Small
Business) Bill 2007 in the production of this Bills Digest.
Costello and Bailey, op cit.
23 May 2007
Bills Digest Service
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