Bills Digest No. 104,
2016–17
PDF version [576KB]
Paula Pyburne
Law and Bills Digest Section
31
May 2017
Contents
Purpose of the Bill
Background
Policy announcement and related
measures
Depreciation
Impact of accelerated depreciation
Why have accelerated depreciation?
Rationale for proposed accelerated
depreciation measures
Committee consideration
Statement of Compatibility with Human
Rights
Policy position of non-government
parties/independents
Position of major interest groups
Financial implications
Table 1: financial impact of
accelerated depreciation arrangements for small business entities and primary
producers as proposed by the Bill ($ million)
Key issues and provisions
Concluding comments
Date introduced: 25
May 2017
House: House of
Representatives
Portfolio: Treasury
Commencement: Sections
1–3 and items 12 and 13 of Schedule 1 on Royal Assent; items 1–11 of
Schedule 1 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 May 2017.
Purpose of
the Bill
The purpose of the Treasury Laws Amendment (Accelerated
Depreciation for Small Business Entities) Bill 2017 (the Bill) is to amend the Income Tax
Assessment Act 1997 (ITAA 1997), the Income Tax
(Transitional Provisions) Act 1997 (Transitional Provisions Act)
and the Tax Laws
Amendment (Small Business Measures No. 2) Act 2015 (2015 Small
Business Measures Act) to implement the 2017–18 Budget announcement
relating to accelerated depreciation arrangements for small business.
In the 2015–16 Budget, the Government increased the small
business immediate deductibility threshold from $1,000 to $20,000 from 12 May
2015 until 30 June 2017.[1]
The Bill extends that measure by 12 months until 30 June 2018, after which
the deductibility threshold will revert to $1,000.
Background
Policy announcement and related measures
The changed depreciation arrangements for small business
were initially announced as part of the 2015–16 Budget[2]
as part of a broader ‘Growing Jobs and Small Business’ 2015–16 Budget package.[3]
At that time, small businesses were defined as having an aggregate annual
turnover of less than $2 million.
In the 2017-18 Budget, the Treasurer, Scott Morrison,
announced that the Government would extend the measure by 12 months to 30 June
2018 for businesses with aggregated annual turnover of less than $10 million.[4]
According to the Treasury budget paper:
Small businesses will be able to immediately deduct purchases
of eligible assets costing less than $20,000 first used or installed ready for
use by 30 June 2018. Only a few assets are not eligible (such as horticultural
plants and in‑house software).
Assets valued at $20,000 or more (which cannot be immediately
deducted) can continue to be placed into the small business simplified
depreciation pool (the pool) and depreciated at 15 per cent in the first income
year and 30 per cent each income year thereafter. The pool can also be
immediately deducted if the balance is less than $20,000 over this period
(including existing pools).
The current ‘lock out’ laws for the simplified depreciation
rules (these prevent small businesses from re-entering the simplified
depreciation regime for five years if they opt out) will continue to be
suspended until 30 June 2018 ...
From 1 July 2018, the immediate deductibility threshold and
the balance at which the pool can be immediately deducted will revert back to
$1,000.[5]
Depreciation
In economic terms, depreciation generally refers to the
actual pattern of decline in the value of assets as they age, whether due to
obsolescence, physical deterioration, or the fact that they have a finite life.[6]
Measuring economic depreciation can be complex and can involve, for example,
consideration of the changes in the real market value of the asset. In order to
avoid distortions in investment decisions, tax depreciation should mirror this
change in value.[7]
The ITAA 1997 defines a depreciating asset
as an asset that has a limited effective life and that is reasonably expected
to decline in value over the time it is used.[8]
It sets out the types of assets that can be depreciated and how the ‘cost’ of
the depreciating asset is measured.[9]
In general terms, depreciation in the tax system is largely based on the
effective life of an asset as self-assessed by the taxpayer or as determined by
the Commissioner of Taxation.[10]
Where these methods approximate economic depreciation any distortions to
investment decisions can be minimised.
Impact of accelerated depreciation
Accelerated depreciation arrangements provide that a
taxpayer can ‘bring forward’ the period(s) over which an asset is depreciated.
This may be by way of:
- a
specified reduction in the period(s) over which an asset is depreciated
compared to the periods which would have been used with reference to the
effective life of an asset or
- by
enabling the cost of the asset to be deducted in its entirety in a single tax
period.
By bringing forward the depreciation expense related to an
asset, ‘tax is deferred during the early years of an asset’s useful life’ and
increases in later years.[11]
The benefit to the taxpayer is confined to the deferral of tax. ‘In after tax
terms, accelerated depreciation increases the net present value of an
investment, or its rate of return, above what it would have been in the absence
of accelerated depreciation.’[12]
Accelerated depreciation arrangements involve a cost to
government revenue in the initial period(s) for which the accelerated
arrangements apply. Such arrangements are ‘equivalent to the government
providing an interest free loan to the taxpayer as revenue collections are
lower in the early years but this is entirely offset in later years’.[13]
One potential economic impact of these arrangements is to
distort decisions about the timing of investments and to encourage uneconomic
investment—although these effects are influenced by the rate of inflation, the
tax status of an entity and the marginal tax rate of the investor.[14]
From an economy-wide perspective, accelerated depreciation can provide
significant benefits to capital intensive industries while being of little
benefit to service industries.[15]
In examining different policy options to assist different industries and
businesses, a comparison could be drawn with the impact of alternative
measures, such as a change in the overall company tax rate.
Why have accelerated depreciation?
There are a number of policy reasons that have supported
the use of accelerated depreciation. According to the second discussion paper
which preceded the final report of the Review of Business Taxation (known as
the Ralph review), they include:
- industries
using assets eligible for accelerated depreciation may produce externalities,
such as benefits for other industries, the introduction of new technology, or
other benefits not directly accruing to owners
- investments
in wasting assets are inherently riskier than other investments and so
accelerated depreciation is justified as a rough tax offset for other tax
system biases against risk and
- other
countries provide such concessions and so we need to match them in order to
remain internationally competitive.[16]
Other rationales that have been used to justify accelerated
depreciation or special tax treatment for small business have included:
- as
a rough compensation for the impact of inflation for businesses utilising
straight line depreciation[17]
- as
a policy tool to stimulate investment and broader demand in the economy[18]
- to
simplify taxation compliance arrangements for small business or to overcome
market imperfections for access to capital.[19]
Rationale for proposed accelerated depreciation measures
The rationale for the proposed accelerated depreciation
measures are included in the Minister’s second reading speech for the Bill[20]
and in the regulation impact statement in the Explanatory Memorandum.[21]
In particular, the Explanatory Memorandum states:
Small businesses contribute in many ways to the Australian
economy, but they often deal with various operational challenges including cash
flow problems and disproportionately higher compliance burdens.
Extending accelerated depreciation for small business
entities for an extra 12 months will continue to stimulate small business
investment and growth by providing cash flow benefits and reducing red tape.[22]
The regulation impact statement
considers three options being:
- no
change—so that small businesses would go back to only being able to claim an
immediate tax deduction for asset purchases that cost less than $1,000 from 1
July 2017
- extending
the immediate deductibility threshold of $20,000 until 30 June 2018—being the
preferred option and
- extending
the immediate deductibility threshold until 30 June 2018 but decreasing it to $15,000.
The enactment of the Treasury Laws
Amendment (Enterprise Tax Plan) Act 2017 operates to significantly expand
the definition of small business entity in the ITAA 1997. It does this by
increasing the maximum aggregated turnover for a small business entity in a
financial year from $2 million to $10 million. That being the case, the second
option was chosen as it will provide access to the concession to an additional
90,000 businesses.[23]
Committee consideration
The Bill has been referred to the Senate Economics
Legislation Committee for inquiry and report by 13 June 2017.[24]
However, the Committee met in private session on 29 May 2017 to consider
the provisions of the Bill and, by unanimous decision, has determined that
there are no substantive matters that require examination.[25]
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.
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.[26]
Policy position of non-government parties/independents
Little has been said about this measure. Mr Shorten did
not refer to it in his budget-reply speech.[27]
In the lead up to the 2016 Federal Election, the
Australian Greens (the Greens) pledged to stand up for small business by,
amongst other things, increasing the ‘small business entity turnover threshold
from an annual turnover of no more than $2 million per annum, to an annual
turnover of no more than $10 million per annum’ and by supporting the ‘$20,000
instant asset write-off’.[28]
Position of major interest groups
In its 2017–18 pre-budget submission, the Australian
Chamber of Commerce and Industry (ACCI) argued that the 2017–18 Budget could
help small businesses to grow and employ if it contained measures to extend
accelerated depreciation for small businesses with turnover up to $10 million
for two years.[29]
ACCI recommended that, given the delay in implementing the Enterprise Tax Plan
Bill:[30]
... the Government extend the accelerated depreciation policy
for small businesses up to $10 million turnover for 2 years from mid-2017
to mid-2019. The success of extending the asset writeoff value from $1,000 to
$20,000 is testament to a well-targeted targeted policy that can boost business
investment and increase the competitiveness of businesses. To ensure that the
policy is relevant and effective, the Australian Chamber recommends that a
review of the program including its uptake, impact and cost to tax revenue be
undertaken around June 2018.[31]
Prior to the 2017–18 Budget, the Council of Small Business
Organisations of Australia (COSBOA) stated that the $20,000 instant asset
write-off is an important policy to all small businesses.[32]
In addition:
To further free-up finances and encourage small business
owners to invest in modernisation or more employees, the Government should
backdate the $20,000 amount. It should apply to all to items that remain on a
small business’ balance sheet which were purchased by the small business before
it was introduced in 2015.[33]
Financial implications
The Explanatory Memorandum states that the financial
impact of the measure proposed by the Bill over the four years to 2020–21 is $650
million (Table 1).
Table 1: financial
impact of accelerated depreciation arrangements for small business entities and
primary producers as proposed by the Bill ($ million)
2016–17 |
2017–18 |
2018–19 |
2019–20 |
2020–21 |
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.
Key issues and provisions
Under the ITAA 1997 a business will be a small
business entity in the current financial year if:
- it
is carrying on a business in the current year and
- one
or both of the following applies:
- in
the previous year before the current year the aggregated turnover
of the business was less than $10 million
- the
aggregated turnover for the current year is likely to be less than $10 million.[34]
Small business entities have access to a
number of existing tax concessions, including capital gains tax concessions and
simplified depreciation arrangements.
Currently a small business entity can choose to use
simplified depreciation arrangements which operate so:
- up
until 30 June 2017, assets costing up to $20,000 can be deducted in the income
year in which they are purchased[35]
- assets
costing more than $20,000 can be included in a ‘general small business pool’
which has depreciation applied at a 15 per cent rate in the first income year
and 30 per cent rate thereafter to the pooled assets, rather than be
individually depreciated.[36]
When the value of the pool is less than the $20,000 threshold, the entire
amount can be deducted in the income year.[37]
These were considered to be temporary measures which were
due to cease on 30 June 2017 at which time the deductible amount would reset to
$1,000.
In addition the ‘lock out rule’ under which a taxpayer who
chooses to apply these simplified arrangements in one income year and does not
choose it in a later income year cannot choose to use these simplified
arrangements for a period of five years is suspended and will continue to be
suspended until 30 June 2018.
Items 1–7 of Schedule 1 to the Bill amend the notes
at the end of relevant paragraphs in Subdivision 328D of the ITAA 1997 to
specify that the threshold is $20,000 for assets that are first acquired
between 12 May 2015 and 30 June 2018—thereby extending the current end
date by 12 months.
Items 8–11 and 12–13 of the Bill make
consequential amendments to the Transitional Provisions Act and 2015 Small
Business Measures Act respectively.
Concluding comments
Accelerated depreciation arrangements have been used for a
number of reasons in the tax system. The proposed measures for small business
are designed to provide incentives to invest and stimulate economic activity.
[1]. K
Swoboda and R Dosser, Tax
Laws Amendment (Small Business Measures No. 2) Bill 2015, Bills digest,
117, 2014–15, Parliamentary Library, Canberra, 28 May 2015.
[2]. Australian
Government, Budget
measures: budget paper no. 2: 2015–16, p 19.
[3]. T
Abbott (Prime Minister), J Hockey (Treasurer) and B Billson (Minister for Small
Business), Growing
jobs and small business package to help small businesses invest more, grow
more, and employ more, joint media release, 12 May 2015.
[4]. S
Morrison (Treasurer), Budget
2017: stronger growth to create more and better paying jobs, media
release, 9 May 2017.
[5]. Australian
Government, Budget
measures: budget paper no. 2: 2017–18, pp. 21–22.
[6]. H
Sanders and R Weiss, ‘Analysis
of the economic and tax depreciation of structures’, Tax Management Real
Estate Journal, 16(12), 6 December 2000, pp. 343–355, ProQuest
database.
[7]. Ibid.,
p. 347.
[8]. ITAA
1997, section 40-1.
[9]. ITAA
1997, section 40-10.
[10]. ITAA
1997, section 40-95. The ITAA 1997 uses the term ‘capital
allowances’ to describe depreciation in some parts.
[11]. JT
Ralph, A
platform for consultation: discussion paper 2: building on a strong foundation,
(Ralph report), Review of Business Taxation, Canberra, February 1999, paragraph
2.1, p. 117.
[12]. Ibid.,
paragraph 2.2.
[13]. Ibid.,
paragraph 2.4.
[14]. M
Benge, ‘Taxes and investment decisions’, in J Head (ed), Fightback: an
economic assessment, papers from a conference organised by the public
sector management institute, Monash University, Australian Tax Research
Foundation, 1993, pp. 171–192.
[15]. Ralph
report, op. cit., paragraph 2.9, p. 118.
[16]. Ibid.,
paragraph 2.14, p. 119.
[17]. Y Margalioth, ‘Not a panacea for economic growth: the case of accelerated depreciation’,
Virginia Tax
Review, 26(3), 2007, pp 493–518 at p. 509,
accessed 7 June 2015.
[18]. Ibid.
[19]. Organisation
for Economic Cooperation and Development (OECD), Taxation
of SMEs: key issues and policy considerations, OECD Tax Policy Studies,
18, pp. 85 and 94.
[20]. M
McCormack (Minister for Small Business), ‘Second
reading speech: Treasury Laws Amendment (Accelerated Depreciation for Small
Business Entities) Bill 2017’, House of Representatives, Debates,
(proof), 25 May 2017, p. 5.
[21]. Explanatory
Memorandum, Treasury Laws Amendment (Accelerated Depreciation for Small
Business) Bill 2017, pp. 13–19.
[22]. Ibid.,
pp. 3–4
[23]. Ibid.,
p. 16.
[24]. Details
or the terms of reference, the submissions to the Senate Economics Legislation
Committee and the final report are available on the inquiry
homepage.
[25]. Senate
Standing Committee on Economics, Treasury
Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2017
[Provisions], The Senate, Canberra, May 2017.
[26]. The
Statement of Compatibility with Human Rights can be found at page 12 of the Explanatory
Memorandum to the Bill.
[27]. B
Shorten, ‘Second
reading speech: Appropriation Bill (No. 1) 2017–2018’, House of
Representatives, Debates, (proof), 11 May 2017, p. 88.
[28]. Australian
Greens, Levelling
the playing field: standing up for small business, Australian Greens
policy document, Election 2016.
[29]. Australian
Chamber of Commerce and Industry (ACCI), Submission
to Treasury, 2017–18 pre-Budget submissions, January 2017, submission 1,
p. 6.
[30]. The
Treasury
Laws Amendment (Enterprise Tax Plan) Bill 2016, which became the Treasury Laws
Amendment (Enterprise Tax Plan) Act 2017, was introduced into Parliament
on 1 September 2016 and passed both Houses on 9 May 2017. It received Royal
Assent on 19 May 2017.
[31]. ACCI,
Submission
to Treasury, op. cit., p. 18.
[32]. Council
of Small Business Australia, Submission
to Treasury, 2017–18 pre-Budget submissions, January 2017, p. 7.
[33]. Ibid.
[34]. ITAA
1997, subsection 328-110. Note that this subsection was amended by item 15
in Part 1 to Schedule 3 of the Treasury Laws
Amendment (Enterprise Tax Plan) Act 2017, but that the amendments have
not yet been incorporated into the current version of the ITAA 1997 on
the Federal Register of Legislation.
[35]. ITAA
1997, section 328-180.
[36]. ITAA
1997, sections 328-185 (pooling) and 328-190 (calculation of depreciation).
[37]. ITAA
1997, section 328-210.
For copyright reasons some linked items are only available to members of Parliament.
© 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.