Chapter 8
Using the benefits of the mining boom to assist small businesses
8.1
This chapter discusses the aspects of the Minerals Resource Rent Tax
(MRRT) legislative package which relate to the taxation treatment of small
businesses. Schedules 1, 2 and 3 to the Tax Laws Amendment
(Stronger, Fairer, Simpler and Other Measures) Bill 2011 (Stronger, Fairer,
Simpler Bill) seek to amend the Income Tax Assessment Act 1997 (ITAA
1997) and related legislation to:
-
abolish the entrepreneurs' tax offset (ETO);
-
increase the small business instant asset write-off threshold
from $1,000 to $6,500 and allow for simplified depreciation of assets which
cost more than $6,500; and
-
allow small businesses to claim an accelerated initial deduction
for motor vehicle purchases.
8.2
Overall, the proposed changes are designed to improve incentives,
simplify existing arrangements and give added support to small businesses. The
Minister's second reading speech links the removal of the ETO and the new
measures outlined elsewhere in the bill, arguing that the removal of the ETO
'makes way for better targeted small business assistance'.[1]
8.3
Although not included in these bills, it is also worth noting that businesses
will be supported by other measures in the Stronger, Fairer, Simpler
package of reforms announced by the government in May 2010. These reforms are
linked to the MRRT (which is also part of the Stronger, Fairer, Simpler reforms),
and include important measures such as the cut in the company tax rate from 30
to 29 per cent from 2013–14.
Abolishing the entrepreneurs' tax offset
8.4
Schedule 1 seeks to abolish the ETO by repealing subdivision 61-J of the
ITAA 1997.
8.5
The ETO was announced by the Howard Government as part of its 2004 re‑election
campaign[2]
and was subsequently introduced in early 2005. The ETO is a tax offset equal to
25 per cent of the income tax payable by certain small businesses (those with
an aggregated turnover of $50,000 or less). The tax offset is phased-out when
the annual turnover is greater than $50,000 but less than $75,000. Amendments
passed in 2010 introduced a new income test which restricted access to the ETO
for businesses with high alternative sources of household income (adjusted
annual income of $70,000 for singles and $120,000 for families).
8.6
The Regulation Impact Statement associated with the introduction of the
ETO noted that the objectives of the measure were to:
... provide encouragement for enterprising Australians in
the early days of a small business, in particular to provide a greater benefit
to businesses with greater productivity, and to provide incentive for the
growth of small business especially the very small, micro and home-based
businesses which are in the STS [simplified tax system].[3]
8.7
When analysing the ETO, the Australia's Future Tax System Review (AFTS
Review, also known as the Henry Review) observed that around 73 per cent of ETO
recipients receive a benefit of less than $600.[4]
The AFTS Review concluded:
Removing the ETO would reduce compliance and administration
costs and provide a more equitable and neutral treatment between
self-employment and employment income. The ETO is very complex to administer
and provides problematic incentives related to business structure.[5]
8.8
Illustrating the AFTS Review's concerns regarding complexity and
administration costs relative to the benefits realised by those eligible, the
example below, published by the Australian Taxation Office (ATO) to assist an individual
or a business in calculating their ETO, results in an offset of only $135 being
realised:
During 2009–10, Jenny ran a physiotherapy practice from her
home. The net income from her practice is $18,000 (that is, $30,000
turnover less $12,000 business expenses). This is Jenny's net small business
income. In addition she had a part-time job from which she received wages of
$27,000. She is married to Geoff who earned $96,000 in 2009–10. Geoff has no
other income.[6]
8.9
The proposed amendments in schedule 1 are intended to commence from the
date of the Royal Assent. The amendments are expected to result in a revenue
gain of $365 million over the forward estimates ($180 million in 2013–14
and $185 million in 2014–15).[7]
8.10
Currently, subdivision 328-D of the ITAA 1997 provides that small
businesses may choose to deduct amounts for most of their depreciating assets
on a diminishing value basis using a pool[8]
that is treated as a single depreciating asset. The pool rate is 30 per cent
for most depreciating assets (general small business pool), and five per cent
for depreciating assets that have an effective life of 25 years or more (long
life small business pool). Depreciating assets with a value of less than $1,000
may be immediately deducted.
8.11
Schedule 2 to the Stronger, Fairer, Simpler Bill seeks to:
-
increase the small business instant asset write-off threshold
from $1,000 to $6,500; and
-
consolidate the general small business pool and the long-life
small business pool and into a single general small business pool which will be
written off at one rate (15 per cent in the year of allocation and 30 per cent
in other years).
8.12
The Minister's second reading speech provides a useful illustration of the
types of benefits small businesses could expect from the amendments:
This increase from a threshold of $1,000 will allow small
businesses to claim a deduction for more expensive assets—those costing less
than $6,500 instead of less than $1,000—providing a cash flow benefit. Small
business will benefit from this initiative when they purchase assets such as a
computer, photocopier and printer.
The government will also simplify the depreciation regime for
depreciating assets costing $6,500 or more. Instead of having to allocate
assets to one of two depreciation pools, each with a different depreciation
rate (five per cent and 30 per cent), small business will now be able to
allocate assets to a single depreciation pool with a single rate of 30 per cent
(and 15 per cent in the first year). Simplicity is what a person in their own
business wants and needs, and we will give them less complexity and a system
that is easier to understand.[9]
8.13
The proposed amendments are broadly consistent with the AFTS Review,
which recommended that small businesses be allowed to write off depreciating
assets costing less than $10,000, as well as a single pool for remaining
depreciating assets.[10]
8.14
The measures are expected to cost $2.3 billion over the forward
estimates ($1.16 billion in 2013–14 and $1.14 billion in 2014–15).[11]
Accelerated initial deductions for
motor vehicles
8.15
Schedule 3 seeks to amend the ITAA 1997 to allow small businesses to
claim an accelerated initial deduction for motor vehicles acquired from 2012–13
onwards. Small businesses purchasing a motor vehicle will be able to write-off
up to $5,000 of its value immediately and, following the amendments made by
schedule 2, will then be able to depreciate any remaining value at 15 per cent
for the first year and 30 per cent in other years.
8.16
The measures are expected to cost $350 million over the forward
estimates ($200 million in 2013–14 and $150 million in 2014–15).[12]
Submitters' views
8.17
Few submissions commented on the amendments contained in schedules 1, 2
and 3 to the Stronger, Fairer, Simpler Bill. The National Farmers' Federation
(NFF) submitted:
While most farm capital expense items will cost well in
excess of the designated threshold, the NFF is positive about the proposal to
allow small farm businesses to access improved depreciation write-downs of
assets such as fencing, sheds and other capital works worth less than $6,500.
We acknowledge that cars are an exception and the first $5,000 can be written
off in depreciation, regardless of whether the asset is valued at a higher
amount ... The NFF also welcomes the administrative benefits of allowing for
the write-off all other assets (except for buildings) in a single depreciation
pool at a rate of 30 per cent (15 per cent in the first year).[13]
Committee view
8.18
While the mining boom can have benefits for the entire economy, it has
also helped facilitate challenging operating environments for many other
businesses within the two‑speed economy.
8.19
Revenue from the MRRT will allow some of the benefits of the mining boom
to be invested in the broader economy by improving conditions for businesses
operating in other sectors. Increasing the small business instant asset
write-off threshold and allowing for simplified asset depreciation will assist
many small businesses throughout the country. The removal of the entrepreneurs'
tax offset, which acts as a disincentive for small businesses to grow, is a
sensible proposal that will also be of overall benefit to small businesses.
8.20
The committee believes these measures to help small businesses should be
supported by the Senate.
Senator Mark Bishop
Chair
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