BILLS DIGEST NO. 116, 2017–18              15 June 2018

Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018

Liz Wakerly
Economics Section 

Date introduced: 24 May 2018

House:  House of Representatives

Portfolio: Treasury

Commencement: Sections 1–3 commence on Royal Assent; Schedule 1 commences on the first 1 January, 1 April, 1 July or 1 October after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at June 2018.

Purpose of the Bill

The purpose of the Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018 (the Bill) is to amend the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax (Transitional Provisions) Act 1997 (Transitional Provisions Act) to extend by 12 months to 30 June 2019 the period during which small business entities can access expanded accelerated depreciation rules.

Structure of the Bill

Schedule 1 to the Bill amends the tax law to extend access to accelerated depreciation for small business entities by 12 months from 30 June 2018 to 30 June 2019, where the asset value is less than $20,000 rather than $1,000. The amendments extend the availability of an immediate deduction for:

•       depreciating assets

•       amounts included in the second element of a depreciating asset’s cost and

•       general small business pools.

Background

In the 2018–19 Budget, the Government announced that it would extend the 2015–16 Budget measure Growing Jobs and Small Business – expanding accelerated depreciation for small businesses by a further 12 months to 30 June 2019 for businesses with an aggregated annual turnover of less than $10 million.[1]

This extension follows an earlier 12 month extension to the measure announced in the 2017–18 Budget.[2] Background to the 2017–18 Budget measure is contained in the Bills Digest for the Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2017.[3]

In October 2017, the then Minister for Small Business, Michael McCormack, announced that approximately 300,000 small businesses had taken advantage of the instant asset write-off (according to 2015–16 tax office data).[4] In 2015–16, the number of claims increased by 50,550 and the average amount claimed increased by $4,056 to $9,000.[5]

In a media release announcing the introduction of the current legislation, the Treasurer, Scott Morrison, claimed that ‘around 3.3 million businesses across the country with an annual turnover of less than $10 million are eligible to access the $20,000 instant asset write-off’.[6] The Government favours a temporary extension over a permanent measure to induce a behavioural response from small business: small businesses are encouraged to bring forward capital investment before the threshold reverts back to $1,000.[7]

How does the instant asset write-off work?

The instant asset write-off, available under the simplified depreciation rules, bypasses the general depreciation rules that require business assets to be depreciated at a rate in line with their actual lifespan (which means deductions for large purchases can take years to flow through to a business’s bank accounts). A business can choose to use the simplified depreciation rules if aggregated turnover is less than $10 million from 1 July 2016 onwards or $2 million for previous income years.[8] Under these rules, a small business can:

•       immediately write-off most depreciating assets that cost less than $20,000 each, that were bought and used, or installed ready for use, from 7.30pm (AEST) on 12 May 2015 until 30 June 2018

•       pool most other depreciating assets that cost $20,000 or more in a small business asset pool and claim

–      a 15% deduction in the first year

–      a 30% deduction each year after the first year and

•       write-off the balance of the small business pool at the end of an income year if the balance, before applying any other depreciation deduction, is less than $20,000.[9]

As noted by Thomson Reuters, ‘while the extension of the write-off will be welcomed, [Small and Medium-sized Enterprises] (SMEs) of course need to have the cash-flow to enable them to spend the $20,000 in the first place’.[10]

In practice, most small businesses fund asset purchases with finance that would require repayments and incur interest payments over several years. The repayment commitments could continue long after the refund under the instant asset write-off had been received.[11]

An asset must be first bought and used, or installed ready-for-use in the year that the deduction is claimed.[12] The entire purchase price of the asset must be less than the $20,000 cap to qualify for the instant asset write-off scheme.[13] For the purposes of the simplified depreciation rules, the purchase of a new asset and the trade in of another asset are considered to be separate transactions.[14] The depreciation deduction is limited to the percentage the asset is used for business or other taxable purposes (for example, managing investments).[15]

Assets valued at $20,000 or more can continue to be placed into the small business asset pool and depreciated at 15 per cent in the first year and 30 per cent each income year thereafter. The balance of the small business pool can be written off at the end of an income year if the balance is less than $20,000.[16]

Committee consideration

The Bill was referred to the Senate Economics Legislation Committee (the Committee) for inquiry and report by 18 June 2018. The Committee met in private session on 29 May 2018 and issued a report stating that ‘by unanimous decision … there are no substantive matters that require examination’.[17]

Neither the Senate Standing Committee for the Scrutiny of Bills nor the Parliamentary Joint Committee on Human Rights had commented on the Bill at the time of writing.

Policy position of non-government parties/independents

The Australian Labor Party (ALP) supports the extension of the instant asset write-off for small business.[18]

In the lead up to the 2016 Federal Election, the Australian Greens supported the $20,000 instant asset write-off.[19]

Position of major interest groups

According to the Explanatory Memorandum, there is strong stakeholder support for extending the instant asset write-off from the Australian Chamber of Commerce and Industry (ACCI), Council of Small Business Australia (COSBOA), Master Builders Australia, Chamber of Commerce and Industry Queensland, and Restaurant & Catering Australia.[20]

In its pre-budget submission, COSBOA called for the Government to extend and ‘enhance’ the $20,000 instant asset write-off.[21] Chief Executive Peter Strong has noted some frustration at having to lobby for an extension of the scheme every year.[22]

KPMG welcomed the extension of the $20,000 instant asset write-off but noted that the concessions had not been widely used, reflecting either poor understanding or a perception that they are too complex and that the costs of compliance do not justify the potential benefits. There was concern that a 12-month extension may not be sufficient to allow for the concessions to be better understood.[23]

CPA Australia Head of Policy, Paul Drum, has argued for making the policy permanent.[24]

Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, has called for a higher value asset threshold of up to $100,000, arguing that ‘$20,000 just doesn’t buy a piece of farming equipment or a new piece of equipment for a manufacturing plant’.[25]

In its pre-budget submission, the ACCI called for an extension of the instant asset write-down to lift business investment.[26]

In a pre-budget poll, seven out of ten small and medium-sized businesses supported an extension of the instant asset write-off.[27]

Financial implications

According to the Explanatory Memorandum, the financial implications over the forward estimates period are as shown in Table 1.

Table 1: financial impact of accelerated depreciation arrangements for small business entities as proposed by the Bill

2016–17

2017–18

2018–19

2019–20

2020–21

2021–22

Total

nil

not zero,
but rounded to zero

-$550m

$50m

$150m

-$350m

Source: Explanatory Memorandum, Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018, p. 3.

The Explanatory Memorandum argues that there will be a decrease in compliance costs ‘because it is an existing measure and there are no new requirements associated with the extension for 12 months’.[28] The estimated net cost to revenue is $350 million over the forward estimates. The estimated annual regulatory saving (calculated over ten years) for businesses is $2.2 million.[29]

This compares with an estimated net cost to revenue of $650 million over the forward estimates and an estimated annual regulatory saving (calculated over ten years) of $2.4 million when the measure was first extended in 2017 (see Table 2).[30]

Table 2: financial impact of accelerated depreciation arrangements under the Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Act 2017

2016–17

2017–18

2018–19

2019–20

2020–21

2021–22

Total

nil

not zero,
but rounded to zero

-$950m

$50m

$250m

-$650m

Source: Explanatory Memorandum, Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2017, p. 3.

It is not clear how these numbers are derived.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[31]

Key issues and provisions

The Transitional Provisions Act currently provides that the accelerated depreciation provisions under the ITAA 1997 apply to a depreciating asset as if references to the $1,000 limit were read as references to a $20,000 limit, where the asset is acquired at or after 2015 budget time[32] and is first used, or first installed ready for use, on or before 30 June 2018.[33]

Item 10 of Schedule 1 to the Bill extends the period to which the $20,000 threshold applies, so that it applies to assets first acquired at or after 7.30pm, by legal time in the Australian Capital Territory on 12 May 2015 and first used or installed ready for use on or before 30 June 2019.[34]

Item 11 of Schedule 1 to the Bill similarly extends from 30 June 2018 to 30 June 2019 the period in which the increased threshold applies for amounts included in the second element of the cost of depreciating assets (for example, an amount spent on improving or transporting a depreciating asset).[35]

A small business entity can deduct the balance of its small business pool at the end of an income year if the balance of the pool is less than a threshold amount.[36] This is usually $1,000; however the Transitional Provisions Act states that the threshold is $20,000 in relation to deductions for an increased access year.[37] Item 9 of Schedule 1 to the Bill amends the definition of increased access year (to which the higher $20,000 threshold applies) to capture an income year which ends on or after 12 May 2015 and on or before 30 June 2019.[38]

Amending this definition also extends the period for which the operation of the lock-out rule is suspended.[39] Under the lock-out rule, a taxpayer who chooses to apply these simplified arrangements in one income year and does not choose it in a later year cannot choose to use the simplified arrangements for a period of five years. The continuing suspension means that businesses which have previously opted out of the simplified depreciation rules are not prevented from re-entering the simplified depreciation system and accessing the higher instant asset write-off threshold.

A number of consequential amendments are made to the ITAA 1997 and the Transitional Provisions Act to update relevant guidance material to reflect the substantive amendments made by the Bill (items 1–8).[40]

© Commonwealth of Australia

Creative Commons

With the exception of the Commonwealth Coat of Arms, and to the extent that copyright subsists in a third party, this publication, its logo and front page design are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia licence.

In essence, you are free to copy and communicate this work in its current form for all non-commercial purposes, as long as you attribute the work to the author and abide by the other licence terms. The work cannot be adapted or modified in any way. Content from this publication should be attributed in the following way: Author(s), Title of publication, Series Name and No, Publisher, Date.

To the extent that copyright subsists in third party quotes it remains with the original owner and permission may be required to reuse the material.

Inquiries regarding the licence and any use of the publication are welcome to webmanager@aph.gov.au.

Disclaimer: Bills Digests are prepared to support the work of the Australian Parliament. They are produced under time and resource constraints and aim to be available in time for debate in the Chambers. The views expressed in Bills Digests do not reflect an official position of the Australian Parliamentary Library, nor do they constitute professional legal opinion. Bills Digests reflect the relevant legislation as introduced and do not canvass subsequent amendments or developments. Other sources should be consulted to determine the official status of the Bill.

Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library’s Central Enquiry Point for referral.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.

[1].              Australian Government, Budget measures: budget paper no. 2: 2018–19, p. 20.

[2].              The 2017–18 Budget measure was implemented by the Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) Act 2017 (Cth).

[3].              P Pyburne, Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2017, Bills digest, 104, 2016–17, Parliamentary Library, Canberra, 31 May 2017.

[4].              M McCormack (Minister for Small Business), 300,000 small businesses benefit from instant asset write-off, media release, 14 October 2017.

[5].              Ibid.

[6].              S Morrison (Treasurer), Backing small business – extending the $20,000 instant asset write-off, media release, 24 May 2018. Note that the Australian Bureau of Statistics records 2.2 million business with turnover of less than $10 million as operating at the end of June 2017 (Source: Australian Bureau of Statistics (ABS), Counts of Australian Businesses, including Entries and Exits, June 2013 to June 2017, cat. no. 8165.0, ABS, Canberra, 2018).

[7].              Explanatory Memorandum, Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018, p. 17.

[8].              Australian Taxation Office (ATO), ‘Simpler depreciation for small business’, ATO website, last modified 7 June 2018.

[9].              Ibid.

[10].              Chartered Accountants Australia and Thomson Reuters, Federal Budget Tax Bulletin 2018–2019, 8 May 2018, p. 17.

[11].              N Prior, ‘Don’t be a tool when it comes to instant kick’, The West Australian, 28 May 2018, p. 3.

[12].              Australian Taxation Office (ATO), ‘Buying and using assets’, ATO website, last modified 10 October 2017.

[13].              If a small business is registered for goods and services tax (GST), the instant asset-write off threshold is $20,000 exclusive of any GST; if a small business is not registered for GST, the instant asset-write off threshold is $20,000 inclusive of any GST (ATO, ‘Simpler depreciation for small business’, op. cit.).

[14].              ATO, , op. cit.

[15].              ATO, ‘Simpler depreciation for small business’, op. cit.

[16].              S Morrison, ‘Second reading speech: Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018’, House of Representatives, Debates (proof), 24 May 2018, p. 2.

[17].              Senate Economics Legislation Committee, Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018 [Provisions]—Report, 29 May 2018.

[18].              J Chalmers (Shadow Minister for Finance), Address to the Australian Chamber of Commerce and Industry, Sydney, speech, 17 May 2018, p. 1.

[19].              Australian Greens, Levelling the playing field: standing up for small business, Australian Greens policy document, Election 2016.

[20].              Explanatory Memorandum, Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018, p. 23.

[21].              Council of Small Business Australia, ‘Budget priorities statement 2018–19’, Treasury website, 2018, p. 7.

[22].              C Waters, ‘Asset write-offs on budget wish list’, The Sydney Morning Herald, 7 May 2018, p. 24.

[23].              KPMG, KPMG Budget 2018 response – a budget of few surprises, media release, 10 May 2018. A previous survey of small and medium-sized businesses by KPMG found that two-thirds had not taken advantage of the instant asset write-off. Most of those that had used it said they bought technology and other new equipment.

[24].              C Busby, ‘Federal Budget: 20k instant asset tax write-off extended’, Business Builders website, 9 May 2018.

[25].              C Waters, ‘Asset write-offs on budget wish list’, The Sydney Morning Herald, 7 May 2018, p. 24.

[26].              Australian Chamber of Commerce and Industry, ‘Pre-budget submission’, 15 December 2017, p. 6.

[27].              C Heaney, ‘Companies want asset write-off to remain’, The Courier Mail, 26 April 2018, p. 45.

[28].              Explanatory Memorandum, Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018, p. 21.

[29].              Ibid., p. 22.

[30].              Explanatory Memorandum, Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2017, p. 3.

[31].              The Statement of Compatibility with Human Rights can be found at page 13 of the Explanatory Memorandum to the Bill.

[32].              Under subsection 328-180(1) of the Transitional Provisions Act, 2015 budget time is defined as 7:30 pm, by legal time in the Australian Capital Territory, on 12 May 2015.

[33].              Transitional Provisions Act, subsection 328-180(4).

[34].              Item 10 amends paragraph 328-180(4)(b) of the Transitional Provisions Act.

[35].              Item 11 amends paragraph 328-180(5)(b) of the Transitional Provisions Act.

[36].              ITAA 1997, section 328-210.

[37].              Transitional Provisions Act, subsection 328-180(6).

[38].              The definition of increased access year is at subsection 328-180(1) of the Transitional Provisions Act.

[39].              Transitional Provisions Act, subsections 328-180(2)–(3). From 7.30pm on 12 May 2015 to 30 June 2018, the ‘lock-out’ rules under subsection 328-175(10) of the ITAA 1997 have been suspended to allow small businesses that have chosen to stop using the simplified depreciation rules to take advantage of the increase in the instant asset write-off threshold. Before this period, the ‘lock-out’ rules prevented small businesses from re-entering the simplified depreciation system for five years if they had opted out (ATO, ‘If you no longer use simplified depreciation’, ATO website, last modified 10 October 2017).

[40].              Items 1 to 7 amend the notes to paragraphs 328-180(1)(b), (2)(a) and (3)(a), note to subsection 328-210(1) and notes to subsections 328-250(1), (4) and 328-253(4) of the ITAA 1997. Item 8 amends the heading to section 328-180 of the Transitional Provisions Act.