Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2004-2005-2006-2007
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TAX LAWS AMENDMENT (SMALL BUSINESS) BILL 2007
EXPLANATORY MEMORANDUM
(Circulated by authority of the
Treasurer, the Hon Peter Costello MP)
Table of contents
Glossary ....................................................................................... 1
General outline and financial impact ....................................................... 3
Chapter 1 The small business framework ...................................... 5
Chapter 2 Aggregated turnover .................................................... 17
Chapter 3 Depreciating asset roll-over relief ................................ 35
Chapter 4 Other changes to the tax law ....................................... 39
Index ..................................................................................... 57
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
CGT capital gains tax
Commissioner Commissioner of Taxation
GDP gross domestic product
GST goods and services tax
GST Act A New Tax System (Goods and Services Tax)
Act 1999
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
PAYG pay as you go
STS simplified tax system
TAA 1953 Taxation Administration Act 1953
1
General outline and financial impact
Small business framework
This Bill introduces a standard eligibility criterion that applies across the
small business tax concessions. Entities that satisfy an aggregated
turnover test of $2 million per annum are able to utilise those concessions
that meet their business needs (if they also satisfy any additional
conditions, not related to the business size, that currently apply to those
concessions).
This Bill also implements several 2006-07 Budget announcements:
· the increase in the capital gains tax maximum net assets
threshold from $5 million to $6 million;
· the extension of the roll-over relief available under the
uniform capital allowance system to small business entities;
· an increase in the simplified tax system (STS) turnover
threshold from $1 million to $2 million;
· the removal of the $3 million depreciating assets test from
the STS eligibility requirements; and
· an increase in the goods and services tax cash accounting
turnover threshold from $1 million to $2 million.
Date of effect: This measure will generally take effect for the 2007-08
and later income years, and from 1 April 2007 for the fringe benefits tax
amendments.
Proposal announced: This measure was announced jointly by the
Treasurer and the Minister for Small Business and Tourism in
Press Release No. 123 of 13 November 2006.
Financial impact: This measure has these revenue implications:
2006-07 2007-08 2008-09 2009-10
nil $7m $137m $151m
3
Compliance cost impact: This measure will reduce compliance costs for
many small business entities because they will only have to meet the
standard eligibility threshold to gain access to multiple concessions.
Chapter 1
The small business framework
Outline of chapter
1.1 Schedule 1 amends the Income Tax Assessment Act 1997
(ITAA 1997) to provide a single definition of a `small business entity' for
the purpose of accessing any of the small business tax concessions.
Item 2 in Schedule 3 amends the ITAA 1997 to list the concessions
available to small business entities.
Context of amendments
1.2 The current tax laws contain a number of special arrangements
for smaller businesses (variously defined), which are often loosely
referred to as `small business concessions'. Each concession has its own
set of eligibility criteria based on the particular group of taxpayers being
targeted. The criteria are tailored to the specific characteristics, policy
objectives and constraints of each particular regime.
1.3 Multiple eligibility criteria across small business concessions,
however justifiable when considered individually, are a source of
complexity and unnecessary compliance costs for small businesses.
1.4 Table 1.1 outlines the current threshold eligibility tests for the
concessions under the simplified tax system (STS), the goods and services
tax (GST), the capital gains tax (CGT), the fringe benefits tax (FBT) and
the pay as you go (PAYG) instalments.
Table 1.1
Concession category Eligibility
Simplified tax system Turnover (value of supplies made in the
ordinary course of carrying on a business).
Goods and services tax Turnover (excluding the value of input taxed
and certain other supplies).
Capital gains tax Net asset value (sum of the market value of
assets minus liabilities related to those assets
and provisions for certain future liabilities).
Fringe benefits tax Total ordinary income plus statutory income.
5
Concession category Eligibility
Pay as you go instalments Base assessment instalment income.
1.5 Under the new small business framework, eligibility for all these
concessions will be based on one test about the size of the business.
Small businesses will be able to access these concessions provided they
also satisfy any additional criteria that currently apply to each concession
that do not relate to determining whether the taxpayer is a small business.
1.6 Amendments to the existing STS, CGT, GST, FBT, and PAYG
instalments provisions to give small business entities access to those
concessions are discussed in Chapter 4. Consequential amendments to the
wine producer's rebate under the wine equalisation tax are also discussed
in Chapter 4.
Summary of new law
1.7 An entity is a small business entity if it:
· carries on a business; and
· satisfies the $2 million aggregated turnover test.
1.8 These two elements together are referred to as the `small
business entity test'.
1.9 Any entity that satisfies the small business entity test can choose
to access the following concessions (subject to any additional criteria set
out in the particular concessions):
· CGT 15-year asset exemption;
· CGT 50 per cent active asset reduction;
· CGT retirement exemption;
· CGT roll-over;
· simplified depreciation rules;
· simplified trading stock rules;
· immediate deduction for certain prepaid business expenses;
· choice to account for GST on a cash basis;
· annual apportionment of GST input tax credits;
· choice to pay GST by instalments;
· FBT car parking exemption; and
· PAYG instalments based on gross domestic product (GDP)
adjusted notional tax.
1.10 Partners in partnerships that are small business entities can also
access the small business CGT concessions (see Chapter 4).
Comparison of key features of new law and current law
New law Current law
The small business entity test applies Simplified tax system
to entities seeking the choice to An entity carrying on a business with
access a range of small business an STS average turnover of less than
concessions. $1 million and depreciating assets of
In addition: less than $3 million can elect to enter
· an entity with net assets the STS and access the STS small
valued at $6 million or less can business concessions.
access a range of CGT small Goods and services tax
business concessions; An entity carrying on an enterprise
· an entity with base assessment with an annual turnover (which
instalment income of less than excludes input taxed and certain
$2 million can access PAYG other supplies) of equal to, or less
instalments based on than, either $1 million or $2 million
GDP-adjusted notional tax; and has access to GST concessions.
· an employer with total Capital gains tax
ordinary income plus statutory An entity with net assets valued at
income of $10 million or less is $5 million or less can access a range
exempt from paying FBT on of CGT small business concessions.
car parking benefits provided
Pay as you go instalments
to employees.
A full self assessment taxpayer
(broadly, companies and
superannuation funds) with a base
assessment instalment income not
exceeding $1 million has the choice
to pay PAYG instalments calculated
on the basis of GDP-adjusted
notional tax.
Fringe benefits tax
An employer with ordinary income
New law Current law
plus statutory income of $10 million
or less is exempt from paying FBT
on car parking benefits provided to
employees.
Existing additional conditions for To be eligible for the small business
accessing concessions are retained. concessions in the relevant Acts, an
entity must also satisfy various
additional conditions specific to each
concession.
There are three ways an entity can STS group turnover is based on a
satisfy the $2 million aggregated look-back test or a look-forward test.
turnover test: The look-back test is the average
· the entity's aggregated turnover of three of the last four
turnover for the previous income years. The look-forward test
income year was less than is a reasonable estimate of turnover
$2 million; for the present income year. An
entity needs to satisfy either the
· the entity's aggregated look-forward test or the look-back
turnover for the current income test.
year is likely to be less than
GST turnover is based on look-back
$2 million, calculated as at the
and look-forward calculations.
first day of the income year; or
· the entity's actual aggregated
turnover for the current income
year was less than $2 million,
calculated as at the end of the
income year.
Detailed explanation of new law
The small business entity test
1.11 This chapter discusses the small business entity test, including
the notion of `carrying on a business', and describes the three ways in
which an entity can satisfy the $2 million aggregated turnover test. The
actual method for calculating an entity's aggregated turnover, and what
needs to be included in it, is discussed in Chapter 2.
1.12 An entity is a small business entity if it:
· carries on a business; and
· satisfies the $2 million aggregated turnover test.
1.13 These two elements together are referred to as the small business
entity test. Small business entities are eligible for the concessions listed in
section 328-10. [Schedule 3, item 2, section 328-10 of the ITAA 1997]
1.14 The $2 million aggregated turnover test applies to the business
income of the entity, not to each business conducted by the entity.
Example 1.1
Edward is a sole trader who carries on two businesses, one as a
robotics manufacturer and another as a software developer. Edward is
a small business entity. It is Edward, not the robotics manufacturing or
the software development business that needs to satisfy the small
business entity test.
Edward satisfies the aggregated turnover test when both of his
businesses, considered together, have a turnover of less than
$2 million.
1.15 A definition of `small business entity' is inserted into the
Dictionary of the ITAA 1997. [Schedule 1, item 7, definition of `small business
entity' in subsection 995-1(1) of the ITAA 1997]
Carrying on a business
1.16 To be a small business entity, an entity must carry on a business.
[Schedule 1, item 1, paragraph 328-110(1)(a) of the ITAA 1997]
1.17 `Business' is defined broadly in the ITAA 1997 to include `any
profession, trade, employment, vocation or calling, but does not include
occupation as an employee'. Carrying on a business is not defined in the
tax law and therefore takes its ordinary meaning.
Winding up a business
1.18 An entity is taken to be carrying on a business for the purposes
of the small business entity test in an income year if:
· the entity is winding up a business it formerly carried on;
and
· it was a small business entity in the income year that it
stopped carrying on the business.
[Schedule 1, item 1, subsection 328-110(5) of the ITAA 1997]
1.19 This rule ensures that a small business entity continues to be
eligible for small business concessions while it is winding up a business it
previously carried on.
1.20 An entity winding up a business will need to calculate what their
turnover would have been had the entity carried on the business for the
entire income year. The rules relating to this are discussed in Chapter 2.
The $2 million aggregated turnover test
1.21 There are three ways an entity can satisfy the $2 million
aggregated turnover test:
· the entity's aggregated turnover for the previous income
year was less than $2 million;
· the entity's aggregated turnover for the current income year,
worked out as at the first day of the income year, is likely to
be less than $2 million; or
· the entity's aggregated turnover for the current income year,
worked out as at the end of the current income year is
actually less than $2 million.
1.22 These tests relate to the timing of the calculation and the
relevant time period for the calculation (as discussed below). The
meaning of aggregated turnover is discussed in Chapter 2.
Test 1: The entity's aggregated turnover in the previous income year
was less than $2 million
1.23 If an entity's aggregated turnover in the previous income year
was less than $2 million it satisfies the $2 million aggregated turnover test
regardless of its likely or actual aggregated turnover for the current year.
[Schedule 1, item 1, subparagraph 328-110(1)(b)(i) of the ITAA 1997]
1.24 Most small business entities will only need to consider this test
because their aggregated turnover in the previous income year will be
under $2 million.
Example 1.2
In the 2007-08 income year, Michael carried on an IT consultancy
business. His aggregated turnover for that income year was
$1.9 million.
For the 2008-09 income year, Michael is a small business entity
because his aggregated turnover for 2007-08 was less than $2 million.
This is irrespective of his likely or actual turnover in the 2008-09
income year.
Test 2: The entity's aggregated turnover in the current income year is
likely to be less than $2 million
1.25 Even if last year's aggregated turnover was greater than
$2 million, an entity will satisfy the $2 million aggregated turnover test if
it is likely that its aggregated turnover for the current income year will be
less than $2 million. [Schedule 1, item 1, subparagraph 328-110(1)(b)(ii) of the
ITAA 1997]
1.26 In Test 2 an entity's aggregated turnover is worked out as at the
first day of the income year. References to as at the first day of the
income year mean that the assessment needs to be based on the entity's
state of affairs that existed as at the first day of the income year. It does
not mean that the assessment of the entity's situation must be performed
on the first day of the income year. [Schedule 1, item 1, paragraph 328-110(2)(a)
of the ITAA 1997]
Example 1.3
Rick is carrying on a business in the 2007-08 income year. He did not
assess his eligibility to be a small business entity, because he decided
that none of the concessions would be suitable for his business needs.
However, on 1 January 2008 Rick starts thinking about selling one of
his business assets and is therefore seeking to determine whether he
satisfies the small business entity test in order to access small business
CGT concessions.
Rick needs to work out his aggregated turnover as at 1 July 2007.
However he may do this at any time in the income year. Undertaking
the calculation in mid-January does not affect the result.
What is meant by references to `likely'
1.27 Any reference to likely means that, on the balance of
probabilities, it is more likely than not that the entity's aggregated
turnover will be under $2 million.
Example 1.4
Hua carries on a business and had an aggregated turnover of
$1.8 million in the 2006-07 income year, and $2.1 million in the
2007-08 income year.
Hua is planning to retire in the 2008-09 income year. When she
retires, she intends to gradually ease out of work by not taking on any
new customers (rather than selling the business as a going concern). In
the income year that Hua starts this process, her aggregated turnover
will fall under $2 million.
Hua does not satisfy Test 1 for the 2008-09 income year because her
aggregated turnover in 2007-08 was greater than $2 million.
However, it is more likely than not that she will begin winding down
her business in the 2008-09 income year and her aggregated turnover
is therefore likely to fall below $2 million. Consequently, she satisfies
Test 2.
Also, the exception to Test 2 (discussed in paragraph 1.31) will not
apply to Hua, given that her aggregated turnover in the 2006-07
income year was less than $2 million.
1.28 Whether an entity's aggregated turnover is likely to be less than
$2 million is an objective test. Some factors to consider in determining
whether it is likely an entity's aggregated turnover would be under
$2 million include:
· the entity's aggregated turnover in previous income years;
· exceptional sales or particular product lines last year that
will not occur this year;
· whether the entity is likely to have reduced staff this year;
· whether the operating hours of the business will decrease;
· whether aspects of the location of the business, or its
industry, indicates a declining turnover (eg, if a drought is
declared in an area, or if prices in the industry decline); or
· whether the business will face increased competition.
Example 1.5
In the 2007-08 income year, a company carried on a professional
painting business. The company's aggregated turnover for that income
year was $2.5 million, and it had 11 staff.
On 1 July 2008, the company received resignation letters from eight of
its 11 employees. The company's sole director anticipates that it will
be difficult to replace these workers during the current income year.
For the 2008-09 income year, the company would fail the $2 million
aggregated turnover test under Test 1, because its aggregated turnover
in the previous income year was greater than $2 million.
However, given that the company's director anticipates difficulty with
replacing its staff, it is likely that its aggregated turnover will be under
$2 million for the 2008-09 income year.
Starting to carry on a business in the current income year
1.29 If the entity starts to carry on a business part-way through an
income year, they work out their aggregated turnover as at the day they
started to carry on a business, rather than working out their aggregated
turnover as at the beginning of the income year. [Schedule 1, item 1,
paragraph 328-110(2)(b) of the ITAA 1997]
1.30 However, entities that start carrying on a business in the current
income year need to calculate what their turnover would have been had
the entity carried on the business for the entire income year. The rules
relating to this are discussed in Chapter 2.
Exception: If the entity's aggregated turnover in the previous two income
years was greater than $2 million
1.31 An entity cannot use Test 2 if its aggregated turnover in each of
the previous two income years (worked out as at the end of those years)
was greater than $2 million. However, the entity may be able to access
some of the small business concessions at the end of the income year if its
turnover for that year was actually under $2 million (see paragraphs 1.33
to 1.36). [Schedule 1, item 1, subsection 328-110(3) of the ITAA 1997]
1.32 This exception prevents abuse of the `likely' test. It will also
reduce the need for the Commissioner of Taxation to engage in costly
compliance activities in order to establish that an entity with aggregated
turnover greater than $2 million for multiple consecutive years is not
likely to have an aggregated turnover of less than $2 million this year.
Example 1.6
The income year is 2009-10, and David is attempting to determine
whether he satisfies the $2 million aggregated turnover test. In the
2007-08 and 2008-09 income years he carried on a business as a
surfboard maker and his aggregated turnover was $2.2 million and
$2.4 million respectively.
In both of those years he claimed he was a small business entity under
Test 2, on the grounds that it was likely that his aggregated turnover
would be under $2 million.
David will not be a small business entity for the 2009-10 income year
under Test 2, even if it is likely that his aggregated turnover will be
under $2 million for that year. This is because his aggregated turnover
in the previous two income years was greater than $2 million.
However, David may be able to rely on Test 3 (see paragraphs 1.33 to
1.36) in order to access some of the small business concessions if his
aggregated turnover actually turns out to be under $2 million as at the
end of the 2009-10 income year.
Test 3: The entity's aggregated turnover for the current income year is
less than $2 million
1.33 The final test applies to the entity's aggregated turnover in the
current income year, worked out as at the end of that income year. The
turnover calculation is based on the entity's actual aggregated turnover for
the income year in which the concessions are sought. [Schedule 1, item 1,
subsection 328-110(4) of the ITAA 1997]
1.34 If the entity started to carry on a business part-way through the
income year, they need to calculate what their turnover would have been
had the entity carried on the business for the entire income year (in line
with paragraph 1.30).
1.35 This rule exists so that, despite an entity's previous aggregated
turnover, or the entity's likely aggregated turnover, an entity is a small
business entity if its actual aggregated turnover is less than $2 million in
an income year.
1.36 An entity that is a small business entity by means of Test 3,
determined at the end of an income year, will not be able to access the
concessions that are used throughout an income year, namely:
· paying PAYG instalments based on GDP-adjusted notional
tax;
· accounting for GST on a cash basis;
· making an annual apportionment of GST input tax credits
for acquisitions and importations that are partly creditable;
and
· paying GST by quarterly instalments.
Example 1.7
Jenny carried on an agricultural business in the 2008-09 income year.
In the 2007-08 income year her aggregated turnover was $3 million
and, as a result, she fails Test 1 of the $2 million aggregated turnover
test.
At the beginning of the 2008-09 income year, it is likely that her
aggregated turnover will continue to be greater than $2 million.
However, on 1 January 2009, a bushfire destroys part of her property.
As a result of this unanticipated event, her actual aggregated turnover
for the 2008-09 ends up being just $500,000.
When filling out her 2008-09 tax returns, Jenny may access the income
tax concessions (including CGT) and the FBT concession provided
that she meets the additional criteria for each concession. However,
Jenny may not access the GST and PAYG instalment concessions.
Diagram 1.1: Whether an entity is a small business entity
Does the entity carry on
a business?
Yes
The entity is a small
business entity and can
access concessions under
Was the entity's the PAYG instalments,
aggregated turnover in the GST, CGT, FBT, and the
Yes
previous income year less former STS.
than $2 million?
No No The entity is a small
Was the entity's business entity and can
Is the entity's aggregated aggregated turnover in access concessions under
turnover in the current
Yes either of the two previous Yes the PAYG instalments,
income year likely to be income years less than GST, CGT, FBT, and the
less than $2 million? $2 million? former STS.
No
Was the entity's actual The entity can access
aggregated turnover, concessions under CGT,
Yes
worked out at the end of FBT and the former STS.
Application and transitional
the current income year
less than $2 million? provisions The entity is unable to
retrospectively access
concessions under PAYG
1.37 These amendments apply to the 2007-08
No incomeinstalments and GST.
year and later
incomeentity is not a small
The
years.
business entity.
Winding up a business
1.38 Transitional arrangements apply for any entity that, in an
income year before the 2007-08 income year, was an STS taxpayer and
stopped carrying on any business. These entities can continue to use
STS concessions in the 2007-08 and later income years if they are
winding up the business they previously carried on (see Chapter 4 for
more details).
Chapter 2
Aggregated turnover
Outline of chapter
2.1 Schedule 1 amends the Income Tax Assessment Act 1997
(ITAA 1997) to create the concept of aggregated turnover, which is used
for determining whether an entity is a small business entity.
2.2 Schedule 3, item 165, amends the Income Tax (Transitional
Provisions) Act 1997 to allow for transitional arrangements for the
calculation of aggregated turnover in the 2005-06 and 2006-07 income
years.
Context of amendments
2.3 Currently, access to the simplified tax system (STS) and goods
and services tax (GST) concessions rely on the concept of `turnover'.
However, turnover is defined differently in each case. Other concessions
rely on other measures of business size such as the net value of assets,
instalment income, or ordinary and statutory income.
2.4 Furthermore, both the STS and the small business capital gains
tax (CGT) concessions contain grouping rules which are designed to stop
larger businesses from artificially splitting their operations to gain access
to the concessions. While these rules are similar, they vary in a number of
ways.
2.5 The small business entity test discussed in Chapter 1 is based on
satisfying a $2 million aggregated turnover test. This Bill introduces a
single concept of aggregated turnover to determine eligibility for the STS,
GST, CGT, fringe benefits tax (FBT) and pay as you go (PAYG)
instalment, small business concessions.
Summary of new law
2.6 This chapter outlines how an entity calculates its aggregated
turnover in order to determine whether it satisfies the aggregated turnover
test described in Chapter 1.
17
Comparison of key features of new law and current law
New law Current law
The turnover of an entity seeking to An entity's STS average turnover is
determine whether it is a small the value of all supplies made by the
business entity is the total ordinary entity in the ordinary course of
income that the entity derives in the carrying on a business.
income year in the ordinary course of Broadly an entity's GST annual
carrying on a business. turnover is the value of all supplies
the entity makes or is likely to make,
excluding input taxed and certain
other supplies, in connection with an
enterprise the entity carries on.
An entity calculates its aggregated STS group turnover is the relevant
turnover including the turnover of threshold for accessing STS
other entities that need to be concessions. In order to calculate its
aggregated with it. STS group turnover, the entity must
If an entity fails the turnover test it include the turnover of entities that
can still access the CGT concessions are grouped with it under the STS
using the maximum net asset test. grouping rules.
The same aggregation rules also When an entity is calculating
apply to the maximum net asset whether it satisfies the maximum net
value test for access to the small asset value test for the small business
business CGT concessions, as well as CGT concessions, there is a set of
the active asset test under the CGT grouping rules that apply to the test
concessions. that are similar to, but different from,
The aggregation rules apply to the the STS grouping rules.
GST concessions. When calculating its annual turnover
for GST purposes, a member of a
GST group needs to include the
value of supplies it and all other
members of the group make, other
than supplies made from one group
member to another (and supplies that
are ordinarily excluded from annual
turnover such as input taxed
supplies). The concept of turnover
for a GST group is a much narrower
concept than turnover for an STS
group.
New law Current law
The aggregation rules use the The STS and CGT grouping rules
concepts of `connected with' (which use the concepts of `connected with',
is based on control) and `affiliates'. `control' and `affiliates'. `Connected
with' is in turn based on `control'.
The definition of `control' and
`affiliate' under these rules are
broadly similar, but differ in detail,
between STS and CGT.
The aggregation rules have a general The grouping rules have a general
40 per cent ownership test for control 40 per cent ownership test for
that applies to all entities except control. For certain entities
discretionary trusts. additional control rules apply.
The aggregation rules contain two There are four different ways an
rules for determining control of entity can control a discretionary
discretionary trusts. trust under the CGT grouping rules,
and three ways an entity can control
a non-fixed trust under STS grouping
rules. Many of these rules have
exceptions.
No special treatment for STS grouping rules contain separate
partnerships. The general 40 per cent rules for the treatment of
ownership test applies. partnerships.
CGT grouping rules rely on the
general test for control for
establishing control of a partnership.
The aggregation rules contain Both the STS and CGT grouping
standard provisions for indirect rules contain separate provisions for
control of another entity. indirect control of another entity, and
there are exceptions for certain
entities under the CGT concessions.
The aggregation rules contain a The STS and CGT grouping rules
single definition of an `affiliate'. both contain a definition of an
`affiliate', but differ in terms of the
types of entities that can be affiliates,
as well as the types of behaviours
that will result in an entity being an
affiliate.
Detailed explanation of new law
2.7 This chapter describes the method an entity uses to calculate its
aggregated turnover for the purposes of determining whether it satisfies
the $2 million aggregated turnover test discussed in Chapter 1.
Steps to calculate aggregated annual turnover
2.8 For an entity to calculate its aggregated turnover, it must first
calculate its annual turnover, secondly apply the aggregation rules, and
thirdly calculate its aggregated turnover.
2.9 Note -- an entity's aggregated turnover is the same as its annual
turnover if no other entities need to be aggregated with it.
Step 1: calculating annual turnover for the income year
2.10 An entity's 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. [Schedule 1, item 1, subsection 328-120(1) and
item 4, definition of `annual turnover' in subsection 995-1(1) of the ITAA 1997]
2.11 Some special rules apply to certain entities and certain dealings
(see paragraphs 2.17 to 2.30).
The basic rule: ordinary income in the ordinary course of carrying on a
business
2.12 `Ordinary income' is a term defined in section 6-5 of the
ITAA 1997 as `income according to ordinary concepts'.
2.13 An entity's annual turnover therefore includes all income
according to ordinary concepts derived in the ordinary course of carrying
on a business, but not other income, such as salary or wages.
Example 2.1
Pamela is employed as a senior manager in a multi-national
corporation, and also carries on a business as a professional musician.
Her ordinary income derived as a manager in the 2007-08 income year
was $2 million. Her ordinary income derived in carrying on a business
as a professional musician was $100,000.
Pamela's turnover for the purposes of step 1 is $100,000. Any income
derived not in the ordinary course of carrying on a business, such as
employment as a manager, does not need to be included in her annual
turnover calculation.
What does `in the ordinary course of carrying on a business' mean?
2.14 The phrase `in the ordinary course of carrying on a business' is
not defined in income tax law. It must therefore be interpreted according
to its ordinary meaning.
2.15 In general, income is derived in the ordinary course of carrying
on a business if the income is of a kind that is regularly or customarily
derived by the entity in the course of carrying on its business, arising out
of no special circumstance or unusual event. Similarly, the income is
derived in the ordinary course of carrying on a business if the income,
although not regularly derived, is a direct result of the normal activities of
the business.
2.16 Ordinary income may be derived in the ordinary course of
carrying on a business even if it is not the main type of ordinary income
derived by the entity. Similarly, the income does not need to account for
a significant part of the entity's overall receipts. It is sufficient that the
ordinary income is of a kind derived regularly or customarily in the
carrying on of a business.
Rules that apply for certain entities and transactions
Sales of retail fuel
2.17 The STS average turnover test provided for regulations to be
made to allow for different methods of calculating turnover for certain
entities. Such a regulation was made for the purposes of fuel retailers,
recognising that entities involved in the sale of retail fuel will often have
high levels of turnover with a very low margin, so that the ordinary
turnover figure would not be a true indicator of size. This Bill retains that
result by bringing the effect of this regulation in to the ITAA 1997.
[Schedule 1, item 1, subsection 328-120(3) of the ITAA 1997]
2.18 The result is that, for the purposes of calculating its turnover, an
entity disregards any income derived from the sale of retail fuel.
2.19 Retail fuel is defined as taxable fuel within the meaning of the
Fuel Tax Act 2006, that is sold by retail. [Schedule 1, item 6, definition of `retail
fuel' in subsection 995-1(1) of the ITAA 1997]
Exclusion of amounts relating to GST
2.20 Any amounts that are non-assessable non-exempt income under
section 17-5 of the ITAA 1997 are excluded from an entity's turnover.
[Schedule 1, item 1, subsection 328-120(2) of the ITAA 1997]
2.21 Section 17-5 describes two types of amounts as non-assessable
non-exempt income (both of which are excluded from the entity's
turnover):
· GST on a taxable supply (within the meaning of the A New
Tax System (Goods and Services Tax) Act 1999 (GST Act));
and
· any increasing adjustment (within the meaning of the
GST Act) that relates to a supply, an acquisition, or arises in
circumstances that give rise to a recoupment that is included
in assessable income.
2.22 The effect of this provision is that an entity does not include
amounts relating to GST when working out their turnover.
Dealings with associates
2.23 If an entity has a dealing with an associate that was not at arm's
length, the entity needs to include in its turnover any ordinary income that
would have resulted from that dealing as if the dealing had been at arm's
length. [Schedule 1, item 1, subsection 328-120(4) of the ITAA 1997]
2.24 This rule ensures that amounts of income derived from
non-arm's length transactions are properly accounted for when
considering the entity's turnover.
2.25 Note that dealings between the entity and an associate that is a
relevant entity for the purposes of these provisions are excluded from the
calculation of turnover (see paragraph 2.64).
2.26 The term `associate' is a defined term in the ITAA 1997 and has
the meaning given by section 318 of the Income Tax Assessment Act 1936.
2.27 The application of the associates rule would typically involve
the substitution of the market value for the actual amount of ordinary
income derived from the good or service being sold. However, the entity
may take into account discounts, for example, that would have been
offered had the dealing been at arm's length.
Example 2.2
Jamila carries on a business as a photo developer and Peter carries on a
business as a wedding photographer. Jamila is a daughter of Peter, and
therefore is his associate. Over the course of a year, Jamila developed
200 films for Peter and only charged him the amount it cost her to
develop the films, with no profit margin.
Given that this is a non-arm's length transaction between associates,
the amount that Jamila needs to include in her turnover is the ordinary
income she would have derived from the developing of those 200 films
had the transaction been at arm's length. A useful guide for the
amount that should be used would be the price she would charge for
any regular customer (taking into account bulk discounts etc).
Note that any income Jamila derives from Peter is disregarded
if Peter is an affiliate of Jamila's under the aggregation rules
(see paragraph 2.25)
Where an entity carries on a business for part of the income year
2.28 If an entity carries on a business for part of the income year
only, its turnover must be worked out using a reasonable estimate of what
the turnover would have been if the entity had carried on a business for
the whole of the income year. [Schedule 1, item 1, subsection 328-120(5) of the
ITAA 1997]
2.29 The intent of this provision is to ensure that the eligibility test of
turnover, as an indicator of the size of a business, is based on income for a
full year. Without this rule, entities that carry on a business for part of an
income year would have a lower turnover than is truly representative of
the size of the business.
Example 2.3
Cayleigh commenced carrying on a business on 1 June 2008, and her
turnover from 1 June to 30 June was $200,000. Applying her turnover
for a month to a full year, a reasonable estimate of her annual turnover
for the 2007-08 income year is $2.4 million.
However, if there is something about her business that indicates that
the month of June would be expected to have a particularly high or low
turnover, then the reasonable estimate of her turnover would vary from
the result under the equation.
An example of this may be if she carries on a ski equipment hiring
business and would therefore be expected to have a high turnover in
the month of June compared with her average monthly turnover. As a
result, her reasonable estimate of her turnover may be less than that
calculated as a simple lineal projection.
Regulations may alter the calculation of annual turnover
2.30 This Bill provides for regulations to be made that may set out
different calculations of annual turnover [Schedule 1, item 1,
subsection 328-120(6) of the ITAA 1997]. The regulations, however, can only
have the affect of reducing the amount of an entity's annual turnover.
Step 2: apply the aggregation rules if necessary
2.31 An entity needs to determine whether another entity's annual
turnover needs to be aggregated with its turnover.
2.32 The annual turnover of other entities needs to be aggregated
with an entity (the test entity) if:
· the test entity is an affiliate of another entity; or
· the test entity is connected with another entity.
2.33 The rules that determine when an entity needs to count the
turnover of another entity are referred to as the aggregation rules.
When is an entity an affiliate of another entity?
2.34 An individual or company is an affiliate of an entity where that
individual or company acts, or could reasonably be expected to act:
· in accordance with the entity's directions or wishes in
relation to the affairs of that individual or company's
business; or
· in concert with the entity in relation to the affairs of the
individual or company's business.
2.35 The definition of `affiliate' is inserted into the Dictionary of the
ITAA 1997. The affiliate rules are designed to ensure that entities that
genuinely carry on independent businesses are not aggregated. [Schedule 1,
item 2, definition of `affiliate' in subsection 995-1(1), and item 1, subsection 328-130(1)
of the ITAA 1997]
2.36 The following factors may have a bearing on whether an
individual or company is an affiliate of an entity to the extent that they
show that two or more entities are acting in concert:
· family or close personal relationships;
· financial relationships or dependencies;
· relationships created through links such as common
directors, partners, or shareholders;
· the degree to which the entities consult with each other on
business matters; or
· whether one of the entities is under a formal or informal
obligation to purchase goods or services or conduct aspects
of their business with the other entity.
2.37 None of these factors are determinative in their own right.
2.38 A spouse or a child under the age of 18 years is not
automatically an affiliate. This is a change to the current CGT law and is
discussed in more detail in Chapter 4.
Example 2.4
Rose and Sam are husband and wife. They both share in the running
of their household. Rose carries on a cleaning business with an
aggregated turnover of $1.7 million while Sam carries on a bakery
with an aggregated turnover of $1.5 million. They both have separate
bank accounts for their businesses and have nothing to do with each
other's businesses. Both businesses are run from different locations
and they have their own employees. Neither Rose nor Sam control the
management of the other's business.
Even though Rose and Sam are married, neither is an affiliate of the
other. The reason is that they do not act in concert with each other in
respect of their businesses, and neither acts in accordance with the
directions or wishes of the other.
2.39 Similarly, an individual or company is not automatically an
affiliate merely because of a business relationship [Schedule 1, item 1,
subsection 328-130(2) of the ITAA 1997]. For example, co-directors, co-trustees
or partners are not necessarily affiliates. Also, directors are not
automatically affiliates of the company of which they are a director, nor
would the company automatically be an affiliate of the directors.
Entities that cannot be an affiliate
2.40 Only an individual or company can be an affiliate of another
entity. Entities (for tax purposes) such as trusts, partnerships, and
superannuation funds are not capable of being affiliates of entities.
When is an entity connected with another entity?
2.41 The definition of `connected with' is amended in the Dictionary
of the ITAA 1997 to mean that an entity is connected with another entity
if one of the entities controls the other entity, or if the two entities are
controlled by the same third entity. [Schedule 1, item 5, definition of
`connected with' in subsection 995-1(1) of the ITAA 1997; Schedule 1, item 1,
subsection 328-125(1) of the ITAA 1997]
2.42 Some control rules apply to all entities except discretionary
trusts, others apply only to discretionary trusts, and some rules apply to
any entity.
Rules that apply to all entities except discretionary trusts
The 40 per cent ownership test
2.43An entity controls another entity where the first entity or its affiliates,
or the first entity and its affiliates between them beneficially own, or have
the right to acquire the beneficial ownership of, interests in the other
entity that between them give the right to receive at least 40 per cent of
any distribution of either:
· income;
· if the other entity is a partnership -- the net income of the
partnership; or
· capital,
by the other entity. This is known as the control percentage. [Schedule 1,
item 1, paragraph 328-125(2)(a) of the ITAA 1997]
2.44The reference to partnerships ensures that a partner of a partnership
that is receiving 40 per cent or more of the net income of the partnership
will be taken to control that partnership.
2.45Where an entity has legal ownership of the interests in the other
entity, but not beneficial ownership of those interests, it will not be
regarded as controlling that entity. If the entity is a partner in a
partnership, that entity's interest in that partnership is a type of interest
that gives the partner the right to receive a distribution of income or
capital by the partnership.
Example 2.5
Patricia is the sole trustee of XYZ non-discretionary trust. Patricia is
also a beneficiary of XYZ non-discretionary trust, and beneficially
owns 30 per cent of any distribution of income from the trust.
Although she is the sole trustee, Patricia does not control the trust. She
only beneficially owns 30 per cent of its income, and therefore does
not exceed the control percentage.
Company-specific test: 40 per cent of voting rights
2.46 An additional test applies for the control by entities of
companies. If either this test, or the 40 per cent ownership test is satisfied,
then that entity controls the company.
2.47 Control of a company will be established if an entity alone or
together with affiliates beneficially own, or has the right to acquire
beneficial ownership of, interests in the company with at least 40 per cent
of the voting power in the company. [Schedule 1, item 1,
paragraph 328-125(2)(b) of the ITAA 1997]
Example 2.6
Pam carries on a business as a sole trader. She also owns interests in
XYZ Company that gives her 30 per cent of the voting rights in that
company. Sean, an affiliate of Pam, also owns interests in
XYZ Company that gives him 30 per cent of the voting rights in that
company.
As Sean is an affiliate of Pam, Pam controls XYZ Company,
notwithstanding that her voting rights are below the control
percentage. This is because Pam's interests, together with Sean's,
amount to giving them the right to exercise more than 40 per cent of
the voting rights in XYZ Company.
Pam would therefore need to include the turnover of both
XYZ Company and Sean when determining whether or not she
satisfies the $2 million aggregated turnover test.
Rules that apply to discretionary trusts
2.48 There are two ways in which an entity can control a
discretionary trust:
· where a special 40 per cent ownership test is satisfied
[Schedule 1, item 1, subsection 328-125(4) of the ITAA 1997]; or
· where the trustee of the trust acts, or could reasonably be
expected to act, in accordance with the directions or wishes
of the entity [Schedule 1, item 1, subsection 328-125(3) of the
ITAA 1997].
The 40 per cent ownership test for discretionary trusts
2.49 An entity is taken to control a discretionary trust for an income
year if, for any of the four income years before that income year:
· the trustee paid any income or capital of the trust to or for
the benefit of the first entity, its affiliates, or the first entity
and its affiliates [Schedule 1, item 1, paragraph 328-125(4)(a) of the
ITAA 1997]; and
· the amount paid or applied to the entity and/or its affiliates
is at least 40 per cent of the total amount of income or capital
paid or applied by the trustee for that income year [Schedule 1,
item 1, paragraph 328-125(4)(b) of the ITAA 1997].
Example 2.7
Gavin is trying to determine whether he is a small business entity for
the 2011-12 financial year. In the 2008-09 income year, Gavin
received a distribution from a discretionary trust. That distribution
constituted 70 per cent of the total amount of the income distributed by
the trust in that financial year. Gavin will be taken to control that trust
because he received a distribution of income in 2008-09 in excess of
40 per cent of the total amount of income distributed in that year.
2.50 Amounts paid to, or applied for the benefit of, exempt entities
(ie, an entity that is exempt from income tax) and deductible gift
recipients (ie, entities to which donations of $2 or more are tax deductible)
are not relevant in determining whether these entities control discretionary
trusts. [Schedule 1, item 1, subsection 328-125(5) of the ITAA 1997]
Trustees acting in accordance with other entities
2.51 If a trustee of a discretionary trust acts, or could reasonably be
expected to act, in accordance with the directions or wishes of an entity
(the first entity), its affiliates or the first entity together with its affiliates,
then the first entity will control the discretionary trust. [Schedule 1, item 1,
subsection 328-125(3) of the ITAA 1997]
2.52 Whether a trustee is accustomed or might reasonably be
expected to act in accordance with the directions or wishes of another, is
determined having regard to all the circumstances of the case. For
example, the mere presence in the trust deed of a requirement that the
trustee should have no regard to such directions or wishes would not
prevent the examination of the actual circumstances to determine whether
an entity controls the trust.
2.53 Some factors which might be considered include:
· the way in which the trustee has acted in the past;
· the relationship between the entities and the trustee;
· the amount of any property or services transferred to the
trust by the entities; and
· any arrangement or understanding between the entities and a
person or persons who have benefited under the trust in the
past.
Rules that apply to all entities
Indirect control of an entity
2.54 If an entity (the first entity) directly controls a second entity, and
that second entity also controls (whether directly or indirectly) a third
entity, the first entity is taken to control the third entity. [Schedule 1, item 1,
subsection 328-125(7) of the ITAA 1997]
2.55 This test is designed to look through business structures that
include interposed entities.
Example 2.8
Matthew Co
40 per cent direct interest
Simpson Co
40 per cent direct and indirect interest
Nareena Co
30 per cent direct and indirect interest
Oslo Co
40 per cent direct and indirect interest
Meniotta Co
Matthew Co controls Simpson Co and Nareena Co, but not Oslo Co or
Meniotta Co.
2.56 Certain entities such as public companies and publicly traded
trusts have a very diffuse and regularly traded ownership and, as a result,
it can be a complicated and difficult process to trace interests through
these types of entities. Therefore, if one of these entities is interposed
between a first and a third entity, the first entity will not control the third
entity merely because of its interests in the interposed public company or
trust. [Schedule 1, item 1, subsection 328-125(8) of the ITAA 1997]
2.57 The types of entities are:
· companies whose shares are listed for quotation in the
official list of an approved stock exchange, unless those
shares are of a type that carry the right to a fixed rate of
dividend;
· publicly traded unit trusts;
· mutual insurance companies;
· mutual affiliate companies; and
· any company where all of its shares are beneficially
owned by one or more of any of the entities listed above.
Example 2.9
Joanna controls a publicly traded unit trust. This publicly traded unit
trust in turn controls a company. There are no other relationships of
control between Joanna and the company.
Joanna will not be taken to control the company through the indirect
control of an entity rule. This is because the indirect control test does
not apply to any entities controlled by the publicly traded unit trust.
2.58 The mere presence of an interposed entity does not result in a
chain of ownership being broken. In Example 2.8, if Simpson Co was a
public company, Matthew Co would not be taken to control Nareena Co.
However, if Matthew Co controlled Nareena Co in some other way, such
as directly owning interests in Nareena Co, then Matthew Co would
control Nareena Co.
The Commissioner's discretion
2.59 Where an entity's interest in another entity is at least 40 per
cent but less than 50 per cent the Commissioner may choose to ignore the
interest of that entity in the other entity if the Commissioner determines
that a third entity actually controls the other entity. [Schedule 1, item 1,
subsection 328-125(6) of the ITAA 1997]
2.60 The Commissioner may think that another entity controls the
entity either based on fact or on a reasonable assumption or inference.
Whether or not the third entity has a 40 per cent interest may assist in
determining whether the third entity controls the other entity, but it is not
decisive.
Example 2.10
Chandra owns a restaurant with a turnover of less than $2 million and
has inherited his father's 42 per cent interest in a software company.
The other 58 per cent of the software company is owned by the
manager of the company, and Chandra has had no dealings with the
manager whatsoever.
The turnover of Chandra's restaurant will not be aggregated with the
turnover of the software company if the Commissioner thinks that the
software company is actually controlled by the other person with the
58 per cent interest.
Step 3: calculating aggregated turnover for the income year
2.61 An entity's aggregated turnover is the sum of the relevant annual
turnovers, excluding certain amounts. Schedule 1, item 1, subsection 328-115(1)
of the ITAA 1997]
Relevant annual turnovers
2.62 `Relevant annual turnovers' consist of the sum of:
· the annual turnover of the entity seeking to satisfy the
$2 million aggregated turnover test;
· the annual turnover of any of the entity's affiliates
(discussed in paragraphs 2.34 to 2.40); and
· the annual turnover of any entity connected with the entity
(discussed in paragraphs 2.41 to 2.60).
[Schedule 1, item 1, subsection 328-115(2) of the ITAA 1997]
2.63 The entity's affiliates and entities that are connected with it are
called `relevant entities' in the provisions.
Amounts that are excluded from the aggregated turnover calculation
2.64 There are three classes of ordinary income excluded from
aggregated turnover to avoid double-counting:
· ordinary income derived by the entity from a dealing with a
relevant entity;
· ordinary income derived by a relevant entity from a dealing
with another relevant entity; and
· ordinary income derived by a relevant entity while it was not
a relevant entity.
[Schedule 1, item 1, subsection 328-115(3) of the ITAA 1997]
Income derived by an entity from a dealing with a relevant entity
2.65 If an entity derives any income from a relevant entity the
income does not need to be included in the aggregate turnover calculation
[Schedule 1, item 1, paragraph 328-115(3)(a) of the ITAA 1997]. As relevant
entities are considered as a single entity, rather than multiple entities,
transactions between them do not constitute part of their aggregated
turnover.
Income derived by a relevant entity from a dealing with another relevant
entity
2.66 Similarly, if income is derived by a relevant entity from a
dealing with another relevant entity, then that amount is excluded from
the aggregated turnover calculation [Schedule 1, item 1, paragraph 328-115(3)(b)
of the ITAA 1997]. An example of this may be a dealing between:
· a trust that is connected with an individual; and
· a company that is an affiliate of that same individual.
2.67 Any income derived from a dealing between the trust and the
company is an excluded amount under the aggregated turnover
calculation.
Example 2.11
Victoria is an affiliate of Lorin under the aggregation rules. Victoria is
also connected with Export Company.
Victoria does not need to include income from any dealing with Lorin
or Export Company in her aggregated turnover calculation.
Further, any dealing between Lorin and Export Company does not
need to be included in Victoria's aggregated turnover.
Income derived from a relevant entity while they were not required to be
aggregated with the entity
2.68 Only income derived by an entity while it was connected to, or
an affiliate of, the other entity is required to be included in the aggregated
turnover calculation. [Schedule 1, item 1, paragraph 328-115(3)(c) of the
ITAA 1997]
Example 2.12
From 1 July 2007 to 31 December 2007, Nerida beneficially owned
interests in QYX Pty Ltd that carry between them the right to receive
50 per cent of any distribution from QYX Pty Ltd.
On 1 January 2008, Nerida disposed of her interest in QYX Pty Ltd.
Nerida was only connected with QYX Pty Ltd from 1 July 2007 to
31 December 2007 and therefore only needs to include the ordinary
income derived by QYX Pty Ltd during that period of time in her
aggregated turnover. The income derived by QYX Pty Ltd from
1 January 2008 to 30 June 2008 is an excluded amount for the
purposes of Nerida's aggregated turnover in the 2007-08 income year.
Application and transitional provisions
2.69 These amendments apply to the 2007-08 income year and later
income years.
2.70 Different application dates apply for certain concessions
available to small business entities (see Chapter 4 for details).
2.71 If an entity has to work out its aggregated turnover for the
2005-06 or 2006-07 income year to determine whether it is a small
business entity, the rules about aggregated turnover apply as if they had
been in force for that year. [Schedule 3, item 165, subsection 328-110(2) of the
Income Tax (Transitional Provisions) Act 1997]
2.72 If an entity has an aggregated turnover for 2006-07 not under
$2 million and wishes to rely on its likely aggregated turnover for the
2007-08 income year to qualify as a small business entity, it needs to
consider its aggregated turnover for the 2005-06 income year. To make it
easier for an entity to work out its eligibility in these circumstances, the
entity can use its STS group turnover figure for the 2005-06 year (as an
alternative to working out its aggregated turnover figure). The entity's
STS group turnover figure will be very similar to its aggregated turnover
amount. [Schedule 3, item 165, subsection 328-110(3) of the Income Tax
(Transitional Provisions) Act 1997]
2.73 There are special transitional arrangements in determining
control of discretionary trusts for the purposes of the form STS
concessions (see Chapter 4 for details).
Chapter 3
Depreciating asset roll-over relief
Outline of chapter
3.1 Schedule 7 to this Bill amends Subdivision 328-D of the Income
Tax Assessment Act 1997 (ITAA 1997) to extend the roll-over relief
available under the uniform capital allowance system to small business
entities who choose to deduct amounts for depreciating assets under
Subdivision 328-D.
3.2 All references to legislative provisions in this chapter are to the
ITAA 1997 unless stated otherwise.
Context of amendments
3.3 Subdivision 328-D sets out the rules for capital allowances for
small business entities. A small business entity can choose to deduct
amounts under Subdivision 328-D for depreciating assets that are used for
a taxable purpose.
3.4 A small business entity that has made the choice to deduct
amounts for depreciating assets under Subdivision 328-D must allocate all
depreciating assets to either a general small business pool or a long life
small business pool and treat each pool as a single asset. The rates of
depreciation are 30 per cent for the general small business pool and
5 per cent for the long life small business pool. Assets with effective lives
of less than 25 years are allocated to the general small business pool while
those having effective lives of 25 years or more are allocated to the long
life small business pool. There is also an immediate deduction for
low-cost assets, that is, assets whose costs are less than $1,000.
3.5 Under Division 40, the uniform capital allowances system
allows deductions for the decline in value of a depreciating asset over the
asset's effective life. The Division provides a set of general rules to
calculate the deduction to taxpayers for the notional decline in value of
most depreciating assets. It also provides pooling mechanisms under
which small expenditures are pooled and taxpayers are allowed
deductions for the decline in value of the pool.
35
3.6 Adjustments may be made to assessable income under the
uniform capital allowances system (balancing adjustments --
section 40-285) when a balancing adjustment event occurs, for
example, when a taxpayer stops holding an asset (section 40-285).
Subsection 40-295(2), specifically, provides that a balancing adjustment
event occurs for a depreciating asset if:
· there is a change in the holding of, or in the interests of
entities in, the asset;
· at least one of the entities that had an interest in the asset
before the change has an interest in it after the change; and
· the asset was held by a partnership either before or as a
result of the change.
3.7 Balancing adjustments are usually based on the difference
between the actual value of the asset at the time of the balancing
adjustment event and its adjusted value (Subdivision 40-D).
Under certain circumstances, either automatic roll-over relief
(subsection 40-430(1)) or optional roll-over relief (subsection 40-340(3))
is available to defer the adjustment to assessable income until actual
disposal of the asset.
3.8 Amendments made to the simplified tax system (STS) by the
Taxation Laws Amendment Act (No. 2) 2004, provided optional roll-over
relief in relation to depreciating assets in an STS pool where there is a
partial change in ownership of an asset held by an STS partnership.
Roll-over relief was only available where the entities both before and after
the change were partnerships. The amendments in the Taxation Laws
Amendment Act (No. 2) 2004 applied to balancing adjustment events
occurring on or after 1 July 2001.
3.9 Roll-over relief for STS taxpayers was extended by the Tax
Laws Amendment (2004 Measures No. 7) Act 2005. This removed the
requirement that both entities, before and after the ownership change,
must be partnerships, thereby catering for situations where, for example, a
sole trader restructured into a partnership, or a partnership restructured to
a sole trader. The amendments apply to balancing adjustment events
occurring on or after 1 July 2005.
3.10 This measure extends the roll-over relief available under the
uniform capital allowances system to small business entities who choose
to claim their capital allowance deductions under Division 328.
3.11 This measure was announced in the Treasurer's Press Release
No. 039 of 9 May 2006.
Summary of new law
3.12 Amendments to Subdivision 328-D extend the optional
depreciating asset roll-over relief available under the uniform capital
allowances regime to small business entities that choose to deduct
amounts for depreciating assets under Subdivision 328-D where:
· 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 company;
or
· a small business entity that chooses to use the capital
allowances for small business entities disposes of all assets in
the small business pool to another taxpayer as a result of a
marriage breakdown.
Comparison of key features of new law and current law
New law Current law
Allow optional roll-over relief for This roll-over relief is currently not
depreciating assets allocated to small available to small businesses in the
business pools where: STS.
· 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 company;
or
· a small business entity that
chooses to use the capital
allowances for small business
entities disposes of all assets in
the small business pool to
another taxpayer as a result of a
marriage breakdown.
Detailed explanation of new law
3.13 Amendments to section 328-243 extend the optional
depreciating asset roll-over relief available under the uniform capital
allowances regime (subsection 40-340(1)) to small business entities that
choose to deduct amounts for depreciating assets under
Subdivision 328-D where:
· 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 company;
or
· a small business entity that chooses to use the capital
allowances for small business entities disposes of all assets in
the small business pool to another taxpayer as a result of a
marriage breakdown.
[Schedule 7, item 1, paragraphs 328-243(1A)(a) to (c) and (f)]
3.14 To be eligible for this roll-over relief, deductions for the
depreciating assets must be calculated under Subdivision 328-D.
Therefore, the assets subject to the roll-over relief must be allocated to the
general small business pool or the long life small business pool at the time
of the balancing adjustment event. [Schedule 7, item 1,
paragraph 328-243(1A)(d)]
3.15 It should be noted that when a taxpayer ceases to deduct
amounts for depreciating assets under Subdivision 328-D or is no longer
eligible to use the Subdivision, depreciating assets that have been
allocated to a general small business pool and a long life small business
pool continue to be depreciated under Subdivision 328-D. This means
that former small business entities, or small business entities that choose
not to continue to use Subdivision 328-D, may choose roll-over relief for
depreciating assets allocated to a small business pool when a balancing
adjustment event occurs under subsection 40-295(2).
3.16 Roll-over relief is only available if the entity or entities that had
an interest in the assets just before the balancing adjustment event (the
transferor) and those that have an interest in the assets just after the
balancing adjustment event occurred (the transferee) jointly choose the
roll-over relief. [Schedule 7, item 1, paragraph 328-243(1A)(e)]
Application and transitional provisions
3.17 These amendments take effect from the start of the income year
following the date of Royal Assent of this Bill. [Schedule 7, item 2]
Chapter 4
Other changes to the tax law
Outline of chapter
4.1 Schedules 2 to 6 and 8 to this Bill amend a number of Acts to:
· give effect to the 2006-07 Budget announcements detailed in
Chapter 1;
· allow small business entities access to the various small
business concessions located in the different Acts; and
· make consequential changes to give effect to the above
amendments.
Context of amendments
Goods and services tax
4.2 The A New Tax System (Goods and Services Tax) Act 1999
(GST Act) contains the following three goods and services tax (GST)
related small business concessions:
· GST cash accounting;
· annual apportionment of input tax credits for acquisitions
and importations that are partly creditable; and
· paying GST by quarterly instalments.
4.3 Currently, in order to be eligible to elect one of these
concessions, an entity's annual turnover for GST purposes must not
exceed either $2 million, in the case of GST instalments and annual
apportionment, or $1 million in the case of cash accounting.
4.4 In the 2006-07 Budget, the Government announced that it would
increase the GST cash accounting threshold to $2 million. The
Government also announced that it would align simplified tax system
39
(STS) and GST definitions of `turnover for small business'. These
proposals have been incorporated into the new small business framework.
4.5 Currently, the GST concessions are available to eligible entities
that are carrying on an enterprise. The concept of carrying on an
`enterprise' is potentially broader than the concept of carrying on a
`business'. For example, an enterprise would include activities done by
charitable institutions, trustees of complying superannuation funds, and
some government bodies. Changes need to be made to the GST Act to
ensure that entities that carry on enterprises, but do not carry on
businesses, continue to have access to the GST concessions if they meet
the eligibility criteria.
Simplified tax system
4.6 Currently, the STS is an optional system that provides for an
alternative method of determining taxable income for entities carrying on
small businesses with straightforward, uncomplicated tax affairs. Eligible
entities that choose to use the STS have special depreciation and trading
stock rules (the standard tax rules apply outside these areas). In addition,
STS taxpayers can claim an immediate full deduction for certain prepaid
expenses.
4.7 As part of the 2006-07 Budget the Government announced a
number of changes to the STS, including:
· increasing the STS average annual turnover threshold from
$1 million to $2 million;
· removing the $3 million depreciating assets test from the
STS eligibility requirements; and
· giving STS taxpayers access to the capital gains tax (CGT)
small business concessions, fringe benefits tax (FBT)
exemption for car parking benefits and the payment of
quarterly pay as you go (PAYG) instalments on the basis of
gross domestic product (GDP) adjusted notional tax.
4.8 These proposals have been incorporated into the new small
business framework.
Capital gains tax
4.9 In the 2006-07 Budget the Government announced that the
maximum net asset value for accessing the small business CGT
concessions would be increased from $5 million to $6 million and that
STS taxpayers would have access to the small business CGT concessions.
The former has been given affect through this Bill and the latter has been
incorporated into the new small business framework.
4.10 The alignment of grouping rules applying to small business
CGT concessions and the new small business framework, announced by
the Treasurer and the Minister for Small Business and Tourism in
Press Release No. 123 of 13 November 2006, has also been incorporated
in the new small business framework.
Fringe benefits tax
4.11 Giving STS taxpayers access to the FBT car parking exemption
was announced in the 2006-07 Budget. This proposal has been
incorporated into the new small business framework.
Pay as you go instalments
4.12 Giving STS taxpayers access to PAYG instalments based on
GDP-adjusted notional tax was announced in the 2006-07 Budget. This
proposal has been incorporated into the new small business framework.
Summary of new law
Goods and services tax
4.13 Under the new law, a small business entity will be eligible to
adopt any of the GST-related small business concessions, providing they
meet any additional specific criteria applying to the concessions.
4.14 The `small business entity' criterion replaces the existing annual
turnover criterion for entities that are carrying on a business. As a result,
these entities will no longer need to work out their turnover one way for
the purposes of the GST concessions and another way for the purposes of
the income tax concessions.
4.15 The existing turnover test in the GST Act will continue to apply
to entities that are carrying on an enterprise, but not a business.
Simplified tax system
4.16 The new law gives small business entities access to the
concessions currently available to STS taxpayers, and gives them the
choice to apply concessions without needing to lodge an election with the
Australian Taxation Office. It is not compulsory for an entity to use any
particular concessions as it was for some of the concessions available
under the STS. The concessions that small business entities choose will
be reflected in their tax returns and substantiated by their records.
4.17 The two-year amendment period applies to small business
entities automatically.
Capital gains tax
4.18 Small business entities can access small business CGT
concessions (provided they satisfy other relevant criteria). If the entity is
not a small business entity, but the net value of its CGT assets is less than
$6 million, it will also be able to access the CGT small business
concessions. The same aggregation rules apply to the maximum net asset
value test and the small business entity test (see Chapter 2).
Fringe benefits tax
4.19 Small business entities can access the FBT car parking
exemption from 1 April 2007. The existing eligibility threshold for the
FBT car parking exemption (ordinary income and statutory income of less
than $10 million) will be retained as an alternative threshold for
employers who are not small business entities.
Pay as you go instalments
4.20 Small business entities that are full self assessment taxpayers
(typically companies and superannuation funds) will be eligible for the
GDP-adjusted notional tax method for calculating instalment liabilities
from the 2009-10 income year. From the 2007-08 income year full self
assessment taxpayers can access the concession if they have base
assessment instalment income (broadly, assessable instalment income in
their latest income tax assessment) not exceeding $2 million.
Comparison of key features of new law and current law
New law Current law
Entities carrying on a business Entities carrying on a business
determine their eligibility for GST determine their eligibility for GST
concessions using the turnover concessions using the turnover
calculation set out by the small calculation in the GST Act.
business entity test.
No change. Entities carrying on an enterprise
New law Current law
(and not a business) determine their
eligibility for GST concessions using
the turnover calculation in the
GST Act.
An eligible entity will not have to To get access to the STS concessions
elect to access concessions. an eligible entity has to elect into the
STS.
A small business entity can choose to An STS taxpayer uses special rules
apply the special rules for deducting for deducting amounts for
amounts for depreciating assets. The depreciating assets. Most
rules are essentially unchanged from depreciating assets are included in a
the present STS rules. pool (either a general pool or a long
life pool) that is treated as a single
depreciating asset. There is an
immediate deduction for low cost
assets.
A small business entity can choose An STS taxpayer does not have to
not to account for changes in the account for changes in the value of
value of their trading stock that do their trading stock that do not exceed
not exceed $5,000 for the income $5,000 for the income year.
year. However, the STS taxpayer can
choose to account for changes in the
value of their trading stock, if they
wish.
A small business entity is normally An STS taxpayer is normally subject
subject to a two-year amendment to a two-year amendment period for
period for their income tax their income tax assessment.
assessment.
If a small business entity incurs If an STS taxpayer incurs certain
certain prepaid expenses for services, prepaid expenses for services, they
they can choose to deduct the are deductible in the year of payment
expense in the year of payment (and (and not over the period of the
not over the period of the service) if service) if the eligible service period
the eligible service period is not is not longer than 12 months and
longer than 12 months and ends ends before the end of the income
before the end of the income year year following the expenditure year.
following the expenditure year.
The maximum net asset value test The maximum net asset value test
threshold for accessing CGT small threshold for accessing CGT small
business concessions is $6 million. business concessions is $5 million.
Small business entities, or entities Only entities with a net asset value of
with a net asset value of less than less than $5 million can access CGT
$6 million, can access CGT small small business concessions.
business concessions.
New law Current law
The same aggregation rules apply for The grouping rules for the CGT
the CGT maximum net asset value maximum net asset test are similar,
test and small business entity test. but subtly different, to those for the
turnover test under the STS.
An employer gets the FBT car An employer gets the FBT car
parking exemption if it is a small parking exemption if its ordinary and
business entity, or if it has ordinary statutory income is less than
and statutory income of less than $10 million.
$10 million.
For full self assessment taxpayers the For full self assessment taxpayers the
base assessment instalment income base assessment instalment income
threshold is $2 million for accessing threshold is $1 million for accessing
PAYG instalments on the basis of PAYG instalments on the basis of
GDP-adjusted notional tax. GDP-adjusted notional tax.
Detailed explanation of new law
Changes to the GST concessions
4.21 Small business entities can access GST concessions subject to
the entity meeting any additional criteria that apply to those concessions.
[Schedule 2, items 8 to 11, 22 and 30, paragraphs 29-40(1)(a), 131-5(1)(a) and
162-5(1)(a), subsection 29-40(1) of the GST Act]
4.22 The GST concessions are:
· accounting for GST on a cash basis;
· annual apportionment of input tax credits for acquisitions
and importations that are partly creditable; and
· paying GST by quarterly instalments.
4.23 The Dictionary in the GST Act is updated to define a `small
business entity' by reference to section 995-1 of the Income Tax
Assessment Act 1997 (ITAA 1997). [Schedule 2, item 59, section 195-1 of the
GST Act]
4.24 An entity that is carrying on a business need not elect a
concession for an income year as a whole. Rather, it can elect a
concession at any time during an income year, subject to any due dates
that currently exist -- such as 28 October in the case of GST instalments.
Existing provisions contained in the GST Act will dictate the date of
effect of the election.
4.25 A choice or election made by a small business entity to adopt
any of the small business concessions will cease to have effect if the entity
is no longer a small business entity. Additionally, a choice or election
made before 1 July 2007 by an entity that is carrying on a business on
1 July 2007 will cease to have effect if that entity is not a small business
entity. The new rules governing the date of effect of a cessation are
comparable to the existing rules. [Schedule 2, items 13, 14, 23 to 25, 29, 31 to 33
and 68 to 70, paragraphs 29-50(1)(a), 131-20(1)(c) and 162-30(1)(c),
subsections 29-50(2), 131-20(5), 157-10(1) and 162-30(5) of the GST Act]
4.26 Entities that carry on an enterprise, but not a business, will
continue to determine their eligibility for the concessions in the current
manner. The rules governing the cessation of an election made by these
entities remain the same. The threshold for accessing the GST cash
accounting method is increased from $1 million to $2 million. [Schedule 2,
items 9, 12 to 14, 22, 23, 26, 29 to 31, 34, 68 to 70, paragraphs 29-40(1)(a), 29-40(3)(a),
29-50(1)(a), 131-5(1)(a), 131-20(1)(c), 162-5(1)(a) and 162-30(1)(c),
subsections 29-50(2), 131-20(6), 157-10(1) and 162-30(5) of the GST Act]
4.27 A note has been added to section 188-5 of the GST Act to
specify that the turnover thresholds in the GST Act for cash accounting,
annual apportionment and instalment only apply to entities that do not
carry on a business. [Schedule 2, item 37, section 188-5 of the GST Act]
4.28 References to `annual turnover' in the GST Act are replaced
with `GST turnover' to avoid confusion with the concept of `annual
turnover' used in the new small business framework. [Schedule 2, items 1 to
7, 16 to 21, 27, 28, 35, 36 and 38 to 58, paragraphs 23-5(b), 27-15(1)(a), 27-37(1)(a),
144-5(2)(a), 149-10(1)(b), 188-10(1)(a) and (b), 188-10(2)(a) and (b),
subsections 23-10(1), 27-20(1), 27-22(1), 31-25(2), 33-10(2), 57-35(1), 83-25(1),
83-30(1), 84-5(2), 188-10(1) and (2), 188-15(1) to (3), 188-20(1) to (3), 188-24(1) and
(2), and 188-40(1), sections 23-1, 188-1, 188-10, 188-15, 188-20, 188-22, 188-23, 188-25
and 195-1 of the GST Act; Schedule 2, items 61 to 65, paragraph 974-75(6)(b),
subsections 974-75(7) and 995-1(1) of the ITAA 1997; Schedule 2, item 66,
paragraphs 286-80(3)(c) and 286-80(4)(c) of Schedule 1 to the Taxation Administration
Act 1953 (TAA 1953)]
4.29 A correction is made to the definition of `turnover threshold'
contained in section 195-1 of the GST Act. Previously this definition was
incomplete, as it did not refer to the instalment and annual apportionment
turnover thresholds. [Schedule 2, item 60, section 195-1 of the GST Act]
4.30 The rules regarding the Commissioner's obligation to revoke
any permission for an entity to account for GST on a cash basis have been
updated to reflect the new `small business entity' concept. Under the new
rules, the Commissioner must revoke any permission granted to a business
entity allowing it to account for GST on a cash basis if the Commissioner
is satisfied that the entity is not a small business entity and it is not
appropriate to permit the entity to account on a cash basis. [Schedule 2,
item 15, paragraph 29-50(3)(a) of the GST Act]
Giving small business entities access to the former STS concessions
4.31 The substance of the concessions currently available to STS
taxpayers remain unchanged under the new small business framework.
4.32 However, minor amendments are required to:
· allow 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 framework; and
· provide that small business entities can choose to use only
those concessions that suit their business needs.
[Schedule 3, items 1 to 78, 81 to 84, 87 to 96, 110 to 120, 149 to 159 and 162,
subparagraphs 328-225(5)(a)(i) and (ii), paragraphs 104-235(4)(b), 328-170(b),
328-175(4)(a), 328-175(7)(a), 328-180(1)(a), 328-185(2)(a) and (b), 328-185(3)(a),
328-205(1)(a) and (c), 328-205(4)(b) and (c), 328-255(1)(a), 328-225(4)(a) and (b),
328-285(1)(a), 328-243(2)(b), 727-15(8)(a) and 727-470(2)(a), subsections 27-100(5),
40-25(1), 40-340(3), 40-425(7), 40-430(1), 70-5(3), 70-35(1), 70-40(1), 70-40(2),70-
45(2), 328-175(1), (3) and (4), 328-180(2), (3) and (5), 328-185(1) and (3) to (7),
328-190(1) to (4), 328-195(1) to (3), 328-205(1), (2) and (4), 328-210(1) and (3),
328-225(1) to (4), 328-235(1) and (2), 328-247(1) and (2), 328-250(3), 328-285(1),
328-295(1) and (2), 716-25(2), 727-470(2), 995-1(1), sections 13-1, 20-157, 328-5,
328-10, 328-170, 328-200, 328-220, 328-280, 328-285 and 727-100 of the ITAA 1997;
Schedule 3, items 163 to 167, paragraphs 328-115(1)(a) and 328-115(2)(a),
subsections 40-10(3) and 328-115(3) and (4) of the Income Tax (Transitional
Provisions) Act 1997]
4.33 Certain provisions that are unnecessary as a result of one or
more of the above changes are repealed. [Schedule 3, items 79 to 80, 85, 86 and
109, subsections 4-15(2), 328-285(1) and (2), section 328-290, Subdivisions 328-F and
328-G of the ITAA 1997]
What are the former STS concessions?
4.34 The former STS concessions available to small business entities
under the new framework are:
· 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.
Changes to the CGT concessions
Small business entities can access small business CGT concessions
4.36 Small business entities can access the small business CGT
concessions under Division 152 of the ITAA 1997, subject to satisfying
the existing eligibility criteria for the concessions. If the entity does not
satisfy the small business test, it may still access the small business CGT
concessions if it satisfies the maximum net asset value test. [Schedule 4,
items 1 to 3, paragraphs 152-5(a) and 152-10(1)(c), section 152-5 of the ITAA 1997]
4.37 Amendments are made to ensure that partners in partnerships
that are small business entities can access small business CGT
concessions subject to existing eligibility criteria. This change is needed
because the small business entity test is intended to operate at the
partnership level, whereas the CGT provisions are designed so that
partners in partnerships access small business CGT concessions. In order
for the CGT concessions to apply to the capital gain made on an asset, the
asset must be an asset of the small business entity partnership. [Schedule 4,
items 2 and 3, subparagraph 152-10(1)(c)(iii) and paragraph 152-5(a) of the
ITAA 1997]
Increase in maximum net asset value test threshold
4.38 The threshold for the maximum net asset value test is raised
from $5 million to $6 million. [Schedule 4, items 2, 4, and 22, 23 and 25,
paragraphs 152-5(a) and 727-15(8)(b), subsections 165-115AA(1) and 165-115GC(4),
section 152-15 of the ITAA 1997]
Applying the small business aggregation rules to the maximum net asset
value test
4.39 The grouping rules that currently apply to the maximum net
asset value test are repealed. The aggregation rules that apply to the small
business entity test under this Bill will be used for entities seeking to
determine whether they satisfy the maximum net asset value test. The
definitions and labels that are currently used for the grouping rules for
small business CGT concessions have been updated for the aggregation
test.
4.40 The term `small business CGT affiliate' is replaced with
`affiliate'. The term `connected with' is retained, however the ITAA 1997
Dictionary is updated to link to the new definition in the aggregation rules
under section 328-125. [Schedule 4, items 5 to 16 and 26,
subparagraphs 152-20(2)(b)(i) and 152-40(1)(a)(ii), paragraphs 152-15(c), 152-20(2)(a)
and (b), 152-20(3)(a), 152-20(2)(b) and 152-40(1)(b), subsections 152-20(4) and
995-1(1), sections 152-25 and 152-30 of the ITAA 1997]
4.41 The definitions of `affiliate' and `connected with' under the
aggregation rules are also used for the active asset test for accessing small
business CGT concessions. That is, an asset will be an active asset where
it is owned by an entity, and used in the course of carrying on a business
by one of the entity's affiliates, or an entity connected with the entity
within the meaning of sections 328-130 and 328-125 respectively. Such
an asset may be an intangible asset.
Spouses and children
4.42 The active asset test is an additional condition that must be
satisfied in order for an entity to gain small business CGT concessions.
The active asset test incorporated the concept of an `affiliate'.
4.43 Under the current small business CGT concessions the definition
of `small business CGT affiliate' includes an entity's spouse or child
under 18 years. The new definition of `affiliate' will apply for the
purposes of the active asset test, and does not provide for spouses and
children under 18 years to be affiliates automatically.
4.44 To ensure that an asset does not lose active asset status as a
result of the above amendments, an asset held by a spouse or child under
18 years is treated as an asset held by an affiliate for the purpose of the
active asset test. [Schedule 4, items 19 and 20, subsections 152-40(1A) and (2) of the
ITAA 1997]
Trusts with tax losses or no taxable income under the active asset test
4.45 Under the definition of `connected with' in the current small
business CGT concessions, an entity controls a discretionary trust where
the trustee nominated the entity as a controller of the trust. In order for
this rule to operate, a number of conditions needed to be satisfied:
· the trust had a tax loss or no taxable income in the income
year;
· the trust made no distributions in that income year;
· the beneficiary was one of not more than four beneficiaries
so nominated; and
· the nomination was in writing and signed by the trustee and
beneficiaries.
4.46 The new definition of `connected with' applying to the
aggregation rules discussed in Chapter 2 does not allow a trustee to
nominate a beneficiary in the way described above. As a consequence,
without a special rule, the nomination would no longer be available for the
purposes of the active asset test.
4.47 Amendments to the active asset test ensure that for the purposes
of determining whether an entity is connected with another entity, in
relation only to the active asset test, an entity is taken to control another
entity where the entity is nominated as a controlling beneficiary. The
other `connected with' rules still apply. [Schedule 4, items 17, 18 and 21,
subsection 152-40(1), section 152-42 of the ITAA 1997]
Changes to the FBT car parking exemption
4.48 Small business entities can access the FBT car parking
exemption under section 58GA of the Fringe Benefits Tax Assessment
Act 1986. This test will operate as an alternative to the $10 million
ordinary and statutory income test that currently applies to the exemption.
[Schedule 5, items 1 to 4, paragraphs 58GA(1)(d) and 58GA(2)(c), subsection 58GA(2)
of the Fringe Benefits Tax Assessment Act 1986]
4.49 Subsection 58GA(3) of the Fringe Benefits Tax Assessment
Act 1986 is amended to include a definition of `small business entities'.
[Schedule 5, item 5, subsection 58GA(3) of the Fringe Benefits Tax Assessment
Act 1986]
Changes to the PAYG instalment concessions
4.50 Full self assessment taxpayers with a base assessment instalment
income not exceeding $2 million are able to have their liability for PAYG
instalments calculated under the GDP-adjusted notional tax method.
[Schedule 6, items 2 and 3, subparagraphs 45-130(1)(b)(ii) and 45-130(1)(c)(i) of
Schedule 1 to the TAA 1953]
4.51 Also, from the 2009-10 income year, full self assessment
taxpayers that are small business entities will be able to have their liability
for PAYG instalments calculated under the GDP-adjusted notional tax
method. [Schedule 7, items 1 and 4 to 8, subsections 45-125(7) and 45-130(1) to (3) of
Schedule 1 to the TAA 1953]
Application and transitional provisions
Goods and services tax
4.52 The changes to the GST Act apply in relation to net amounts for
tax periods starting on or after 1 July 2007. Most of the consequential
amendments to the ITAA 1997 that change the GST labels apply to the
2007-08 income year and later income years. The consequential
amendments to the ITAA 1997 and the TAA 1953 that change the
`current annual turnover' label apply in relation to the year starting on
1 July 2007 and later years. [Schedule 2, Part 3]
Simplified taxation system
4.53 The changes to the ITAA 1997 relating to the STS concessions
apply to assessments for the 2007-08 income year and later income years.
[Schedule 3, Part 3]
Winding up a business an entity formerly carried on
4.54 Currently, an entity can continue to be treated as an STS
taxpayer in an income year where they are winding up a business they
previously carried on, if they were an STS taxpayer for the income year
they stopped carrying on business.
4.55 Transitional provisions apply so that an entity that was an STS
taxpayer in an income year before 2007-08 and stopped carrying on a
business would be able to use the current STS concessions
(ie, depreciating assets, trading stock, pre-paid expenses and amendment
periods) in 2007-08 or a later income year when winding up the business.
[Schedule 3, item 165, section 328-111 of the Income Tax (Transitional Provisions)
Act 1997]
Control of a discretionary trust
4.56 Under the current STS grouping rules, an entity controls a
non-fixed trust if in any of the previous four income years, the trustee of
that trust made a distribution to the entity or its affiliates between them of
an amount exceeding $100,000.
4.57 The aggregation rules apply a 40 per cent distribution test rather
than a $100,000 test (see Chapter 2).
4.58 Consequently, an entity that had received a distribution of less
than $100,000 but greater than 40 per cent of the total amount distributed
would, in the absence of a special rule, be taken to control a discretionary
trust for the purpose of accessing the former STS concessions where it
had not been previously.
4.59 To prevent that result, a transitional provision applies for the
former STS concessions so that an entity will not be grouped with a
discretionary trust if, in any of the previous four income years, there was a
distribution of greater than 40 per cent but less than $100,000. This
transitional provision will only apply for distributions made before the
2007-08 income year. The provision will cease to have effect from the
2011-12 income year. [Schedule 3, item 165, section 328-112 of the Income Tax
(Transitional Provisions) Act 1997]
Simplified depreciation concession
4.60 Assets that are currently in an STS pool -- a general STS pool or
a long life STS pool -- continue to be subject to the pooling rules. To
ensure continuity in the treatment of depreciating assets, a general STS
pool or long life STS pool is treated as allocated to a general small
business pool or long life small business pool respectively. The closing
pool balance (with any required adjustments) of an STS pool is carried
forward to become the opening pool balance of a small business pool.
[Schedule 3, item 173, sections 328-185 and 328-195 of the Income Tax (Transitional
Provisions) Act 1997]
Five-year re-entry restriction
4.61 The current law contains a rule that if you choose to stop being
an STS taxpayer you cannot again become an STS taxpayer until at least
five years after the income year you left the STS (subsection 328-440(3)
of the ITAA 1997).
4.62 This notion will be retained for the simplified depreciation
concession only. The new rule is that if the entity chooses to stop using
the simplified depreciation concession it cannot again choose to use that
concession until at least five years after the income year in which it chose
to stop using that concession. [Schedule 3, item 12, section 328-175 of the
ITAA 1997; Schedule 3, item 174, section 328-440 of the Income Tax (Transitional
Provisions) Act 1997]
Example 4.1
In the 2007-08 income year, Daryl was a small business entity and
used the simplified depreciation concession. In the 2008-09 income
year he decides to cease using the concession.
Daryl will not be able to use the simplified depreciation concession
until 2014-15 income year. He will need to be a small business entity
in that income year to access the concession.
STS accounting method
4.63 Before 1 July 2005 STS taxpayers were required to use the STS
accounting method (generally referred to as a cash basis of accounting).
This was removed from the STS from 1 July 2005 and STS taxpayers
have since been able to calculate their taxable income using the most
appropriate method for their circumstances. If an entity was an STS
taxpayer for the most recent income year starting before 1 July 2005, it
could continue to use the STS accounting method.
4.64 Existing provisions ensure that if a business decided to stop
using the STS accounting method, or was no longer eligible for the STS,
business income and expenses that have not previously been accounted
for (because they had not been received or paid) would be accounted for
in the year the business changed its accounting method (see Division 328
of the Income Tax (Transitional Provisions) Act 1997).
4.65 This transitional provision will be carried into the new small
business framework to ensure that a taxpayer can continue using the STS
accounting method if it:
· was in the STS in the 2006-07 income year;
· was using the STS accounting method continuously since
before 1 July 2005; and
· is a small business entity from the 2007-08 income year.
[Schedule 3, items 168, 170 and 172, subsections 328-115(3) and (4), section 328-120 of
the Income Tax (Transitional Provisions) Act 1997]
4.66 A taxpayer can continue using the STS accounting method until
it chooses not to, or is no longer a small business entity.
Capital gains tax
4.67 The amendments to the ITAA 1997 relating to the small
business CGT concessions apply to CGT events happening in the 2007-08
income year and later years.
Indirect value shifting
4.68 Under the current law, an interest will not be considered to be an
affected interest for the purposes of the indirect value shifting regime if
the owner of the interest is an STS taxpayer immediately before the
commencement of an indirect value shifting scheme.
4.69 A transitional provision ensures that an interest will continue to
not be an affected interest if its owner would have been an STS taxpayer
at the time of the commencement of an indirect value shifting scheme, and
that time of commencement was before the start of the 2007-08 income
year had the provisions regarding the STS not been repealed. [Schedule 3,
item 175, section 727-470 of the Income Tax (Transitional Provisions) Act 1997]
Fringe benefits tax
4.70 The amendments to the Fringe Benefits Tax Assessment
Act 1986 apply to the FBT year starting on 1 April 2007 and later
FBT years.
4.71 Transitional rules apply so that the FBT car parking exemption
can apply to an employer that would have been a small business entity in
an earlier income year (2005-06 or 2006-07), if the small business entity
rules had applied in that year. This overcomes a potential technical
problem arising from the small business entity rules applying from the
2007-08 income year. [Schedule 5, item 7]
PAYG instalments
4.72 The increase from $1 million to $2 million in the base
assessment instalment income threshold for full self assessment taxpayers
accessing PAYG instalments based on GDP-adjusted notional tax will
apply to the 2007-08 income year and later income years. Full self
assessment taxpayers who are small business entities will be able to
access the PAYG instalments based on GDP-adjusted notional tax from
the 2009-10 income year and later income years. [Schedule 6, items 1 and
4 to 8, subsections 45-125(7) and 45-130(1) to (3) of Schedule 1 of the TAA 1953]
Wine equalisation tax
4.73 The consequential amendments to the A New Tax System (Wine
Equalisation Tax) Act 1999 apply in relation to producer rebates for the
2007-08 financial year and later financial years.
Consequential amendments
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 1997. [Schedule 8, items 1 to 8, subsection 82KZL(1) of the Income Tax
Assessment Act 1936 (ITAA 1936), Subdivision 960-Q and subsection 995-1(1) of the
ITAA 1997 and section 40-340 of the Income Tax (Transitional Provisions) Act 1997]
Simplified tax system
4.75 The definition and references to STS taxpayer and associated
concepts for the prepayment concession and two-year amendment period
in the ITAA 1936 are repealed and amended so that small business
entities can choose to access the prepayment concession and have
two-year amendment periods. [Schedule 3, items 97 to 108, subsections 6(1),
82KZL(1), 170(1) and (14), section 82KZMD, paragraphs 73BA(4)(a) and
82KZMA(2)(b), subparagraph 82KZM(1)(aa)(i) of the ITAA 1936]
4.76 The entrepreneur's tax offset uses turnover definitions based on
the STS definitions, which are repealed and replaced with the
corresponding turnover concepts discussed in Chapter 2. References to
the STS are repealed and amended so that small business entities may be
eligible for the entrepreneur's tax offset. [Schedule 3, items 121 to 148, 160 and
161, sections 61-500 and 61-525, subsections 61-505(2), 61-510(2), 61-515(2) and
61-520(2), paragraphs 61-505(1)(b) to (d), 61-510(1)(b), (c) to (e), 61-515(1)(b) to (e)
and 61-520(1)(b), (c) to (e) and subsection 995-1(1) of the ITAA 1997]
Capital gains tax
4.77 Consequential amendments are made to an example in the
ITAA 1997 to link it to the new definition of `connected with' under
section 328-125 that applies for CGT events. [Schedule 4, items 29 and 30,
subsections 104-197(2) and 152-305(3) of the ITAA 1997]
4.78 Entities of the type listed in subsection 328-125(8) cannot
disregard a capital gain under the small business retirement exemption.
The entities referred to are discussed in Chapter 2. [Schedule 4, item 30,
subsection 152-305(3) of the ITAA 1997]
Wine equalisation tax
4.79 The wine producers' rebate provides wine producers with a
rebate of up to $500,000 per wine producer or wine producer group. A
wine producer group comprises a wine producer and any associated
producers.
4.80 A producer is considered to be an associated producer if they are
`connected with' the other producer within the meaning of the current
CGT grouping rules. As the definition of `connected with' is moving
from Division 152 to Division 328 of the ITAA 1997, the provisions in
the A New Tax System (Wine Equalisation Tax) Act 1999 need to be
updated to reflect the changed location of the definition. [Schedule 4,
item 28, section 33-1 of the A New Tax System (Wine Equalisation Tax) Act 1999]
4.81 Also, the existing A New Tax System (Wine Equalisation Tax)
Act 1999 provisions exclude the operation of the public entity exception to
the indirect control of entities rule currently under subsection 152-30(8).
This exclusion will continue under the new law. [Schedule 4, item 27,
paragraph 19-20(1)(a) of the A New Tax System (Wine Equalisation Tax) Act 1999]
Index
Schedule 1: Small business entities
Bill reference Paragraph number
Item 1, paragraph 328-110(1)(a) of the ITAA 1997 1.16
Item 1, subparagraph 328-110(1)(b)(i) of the ITAA 1997 1.23
Item 1, subparagraph 328-110(1)(b)(ii) of the ITAA 1997 1.25
Item 1, paragraph 328-110(2)(a) of the ITAA 1997 1.26
Item 1, paragraph 328-110(2)(b) of the ITAA 1997 1.29
Item 1, subsection 328-110(3) of the ITAA 1997 1.31
Item 1, subsection 328-110(4) of the ITAA 1997 1.33
Item 1, subsection 328-110(5) of the ITAA 1997 1.18
Item 1, subsection 328-115(2) of the ITAA 1997 2.62
Item 1, subsection 328-115(3) of the ITAA 1997 2.64
Item 1, paragraph 328-115(3)(a) of the ITAA 1997 2.65
Item 1, paragraph 328-115(3)(b) of the ITAA 1997 2.66
Item 1, paragraph 328-115(3)(c) of the ITAA 1997 2.68
Item 1, subsection 328-120(1) and item 4, definition of `annual 2.10
turnover' in subsection 995-1(1) of the ITAA 1997
Item 1, subsection 328-120(2) of the ITAA 1997 2.20
Item 1, subsection 328-120(3) of the ITAA 1997 2.17
Item 1, subsection 328-120(4) of the ITAA 1997 2.23
Item 1, subsection 328-120(5) of the ITAA 1997 2.28
Item 1, subsection 328-120(6) of the ITAA 1997 2.30
Item 1, paragraph 328-125(2)(a) of the ITAA 1997 2.43
Item 1, paragraph 328-125(2)(b) of the ITAA 1997 2.47
Item 1, subsection 328-125(3) of the ITAA 1997 2.48 and 2.51
Item 1, subsection 328-125(4) of the ITAA 1997 2.48
Item 1, paragraph 328-125(4)(a) of the ITAA 1997 2.49
Item 1, paragraph 328-125(4)(b) of the ITAA 1997 2.49
Item 1, subsection 328-125(5) of the ITAA 1997 2.50
Item 1, subsection 328-125(6) of the ITAA 1997 2.59
Item 1, subsection 328-125(7) of the ITAA 1997 2.54
57
Bill reference Paragraph number
Item 1, subsection 328-125(8) of the ITAA 1997 2.56
Item 1, subsection 328-130(2) of the ITAA 1997 2.39
Item 2, definition of `affiliate' in subsection 995-1(1), and item 1, 2.35
subsection 328-130(1) of the ITAA 1997
Item 5, definition of `connected with' in subsection 995-1(1) of the 2.41
ITAA 1997; Schedule 1, item 1, subsection 328-125(1) of the
ITAA 1997
Item 6, definition of `retail fuel' in subsection 995-1(1) of the 2.19
ITAA 1997
Item 7, definition of `small business entity' in subsection 995-1(1) 1.15
of the ITAA 1997
Schedule 2: Amendments relating to GST turnover
thresholds
Bill reference Paragraph number
Items 1 to 7, 16 to 21, 27, 28, 35, 36 and 38 to 58, 4.28
paragraphs 23-5(b), 27-15(1)(a), 27-37(1)(a), 144-5(2)(a),
149-10(1)(b), 188-10(1)(a) and (b), 188-10(2)(a) and (b),
subsections 23-10(1), 27-20(1), 27-22(1), 31-25(2), 33-10(2),
57-35(1), 83-25(1), 83-30(1), 84-5(2), 188-10(1) and (2), 188-15(1)
to (3), 188-20(1) to (3), 188-24(1) and (2), and 188-40(1),
sections 23-1, 188-1, 188-10, 188-15, 188-20, 188-22, 188-23,
188-25 and 195-1 of the GST Act; Schedule 2, items 61 to 65,
paragraph 974-75(6)(b), subsections 974-75(7) and 995-1(1) of the
ITAA 1997; Schedule 2, item 66, paragraphs 286-80(3)(c) and
286-80(4)(c) of Schedule 1 to the TAA 1953
Items 8 to 11, 22 and 30, paragraphs 29-40(1)(a), 131-5(1)(a) and 4.21
162-5(1)(a), subsection 29-40(1) of the GST Act
Items 9, 12 to 14, 22, 23, 26, 29 to 31, 34, 68 to 70, paragraphs 4.26
29-40(1)(a), 29-40(3)(a), 29-50(1)(a), 131-5(1)(a), 131-20(1)(c),
162-5(1)(a) and 162-30(1)(c), subsections 29-50(2), 131-20(6),
157-10(1) and 162-30(5) of the GST Act
Items 13, 14, 23 to 25, 29, 31 to 33 and 68 to 70, 4.25
paragraphs 29-50(1)(a), 131-20(1)(c) and 162-30(1)(c),
subsections 29-50(2), 131-20(5), 157-10(1) and 162-30(5) of the
GST Act
Item 15, paragraph 29-50(3)(a) of the GST Act 4.30
Item 37, section 188-5 of the GST Act 4.27
Item 59, section 195-1 of the GST Act 4.23
Item 60, section 195-1 of the GST Act 4.29
Part 3 4.52
Schedule 3: STS taxpayers
Bill reference Paragraph number
Items 1 to 78, 81 to 84, 87 to 96, 110 to 120, 149 to 159 and 162, 4.32
subparagraphs 328-225(5)(a)(i) and (ii), paragraphs 104-235(4)(b),
328-170(b), 328-175(4)(a), 328-175(7)(a), 328-180(1)(a),
328-185(2)(a) and (b), 328-185(3)(a), 328-205(1)(a) and (c),
328-205(4)(b) and (c), 328-255(1)(a), 328-225(4)(a) and (b),
328-285(1)(a), 328-243(2)(b), 727-15(8)(a) and 727-470(2)(a),
subsections 27-100(5), 40-25(1), 40-340(3), 40-425(7), 40-430(1),
70-5(3), 70-35(1), 70-40(1), 70-40(2),70-45(2), 328-175(1), (3) and
(4), 328-180(2), (3) and (5), 328-185(1) and (3) to (7), 328-190(1)
to (4), 328-195(1) to (3), 328-205(1), (2) and (4), 328-210(1) and
(3), 328-225(1) to (4), 328-235(1) and (2), 328-247(1) and (2),
328-250(3), 328-285(1), 328-295(1) and (2), 716-25(2),
727-470(2), 995-1(1), sections 13-1, 20-157, 328-5, 328-10,
328-170, 328-200, 328-220, 328-280, 328-285 and 727-100 of the
ITAA 1997; Schedule 3, items 163 to 167,
paragraphs 328-115(1)(a) and 328-115(2)(a), subsections 40-10(3)
and 328-115(3) and (4) of the Income Tax (Transitional Provisions)
Act 1997
Item 2, section 328-10 of the ITAA 1997 1.13
Item 12, section 328-175 of the ITAA 1997; Schedule 3, item 174, 4.62
section 328-440 of the Income Tax (Transitional Provisions)
Act 1997
Items 79 to 80, 85, 86 and 109, subsections 4-15(2), 328-285(1) 4.33
and (2), section 328-290, Subdivisions 328-F and 328-G of the
ITAA 1997
Items 97 to 108, subsections 6(1), 82KZL(1), 170(1) and (14), 4.75
section 82KZMD, paragraphs 73BA(4)(a) and 82KZMA(2)(b),
subparagraph 82KZM(1)(aa)(i) of the ITAA 1936
Items 121 to 148, 160 and 161, sections 61-500 and 61-525, 4.76
subsections 61-505(2), 61-510(2), 61-515(2) and 61-520(2),
paragraphs 61-505(1)(b) to (d), 61-510(1)(b), (c) to (e), 61-
515(1)(b)to (e) and 61-520(1)(b), (c) to (e) and subsection 995-1(1)
of the ITAA 1997
Item 165, subsection 328-110(2) of the Income Tax (Transitional 2.71
Provisions) Act 1997
Item 165, subsection 328-110(3) of the Income Tax (Transitional 2.72
Provisions) Act 1997
Item 165, section 328-111 of the Income Tax (Transitional 4.55
Provisions) Act 1997
Item 165, section 328-112 of the Income Tax (Transitional 4.59
Provisions) Act 1997
Bill reference Paragraph number
Items 168, 170 and 172, subsections 328-115(3) and (4), 4.65
section 328-120 of the Income Tax (Transitional Provisions)
Act 1997
Item 173, sections 328-185 and 328-195 of the Income Tax 4.60
(Transitional Provisions) Act 1997
Item 175, section 727-470 of the Income Tax (Transitional 4.69
Provisions) Act 1997
Part 3 4.53
Schedule 4: Capital gains tax small business concessions
Bill reference Paragraph number
Items 1 to 3, paragraphs 152-5(a) and 152-10(1)(c), section 152-5 4.36
of the ITAA 1997
Items 2 and 3, subparagraph 152-10(1)(c)(iii) and 4.37
paragraph 152-5(a) of the ITAA 1997
Items 2, 4, and 22, 23 and 25, paragraphs 152-5(a) and 4.38
727-15(8)(b), subsections 165-115AA(1) and 165-115GC(4),
section 152-15 of the ITAA 1997
Items 5 to 16 and 26, subparagraphs 152-20(2)(b)(i) and 4.40
152-40(1)(a)(ii), paragraphs 152-15(c), 152-20(2)(a) and (b),
152-20(3)(a), 152-20(2)(b) and 152-40(1)(b), subsections 152-
20(4) and 995-1(1), sections 152-25 and 152-30 of the ITAA 1997
Items 17, 18 and 21, subsection 152-40(1), section 152-42 of the 4.47
ITAA 1997
Items 19 and 20, subsections 152-40(1A) and (2) of the ITAA 1997 4.44
Item 27, paragraph 19-20(1)(a) of the A New Tax System (Wine 4.81
Equalisation Tax) Act 1999
Item 28, section 33-1 of the A New Tax System (Wine Equalisation 4.80
Tax) Act 1999
Items 29 and 30, subsections 104-197(2) and 152-305(3) of the 4.77
ITAA 1997
Item 30, subsection 152-305(3) of the ITAA 1997 4.78
Schedule 5: Fringe benefits tax: car parking exemption
Bill reference Paragraph number
Items 1 to 4, paragraphs 58GA(1)(d) and 58GA(2)(c), 4.48
Bill reference Paragraph number
subsection 58GA(2) of the Fringe Benefits Tax Assessment
Act 1986
Item 5, subsection 58GA(3) of the Fringe Benefits Tax Assessment 4.49
Act 1986
Item 7 4.71
Schedule 6: PAYG instalments
Bill reference Paragraph number
Items 1 and 4 to 8, subsections 45-125(7) and 45-130(1) to (3) of 4.72
Schedule 1 of the TAA 1953
Items 2 and 3, subparagraphs 45-130(1)(b)(ii) and 45-130(1)(c)(i) 4.50
of Schedule 1 to the TAA 1953
Schedule 7: Roll-over relief
Bill reference Paragraph number
Item 1, paragraphs 328-243(1A)(a) to (c) and (f) 3.13
Item 1, paragraph 328-243(1A)(d) 3.14
Item 1, paragraph 328-243(1A)(e) 3.16
Items 1 and 4 to 8 , subsections 45-125(7) and 45-130(1) to (3) of 4.51
Schedule 1 to the TAA 1953
Item 2 3.17
Schedule 8: Miscellaneous amendments
Bill reference Paragraph number
Items 1 to 8, subsection 82KZL(1) of the Income Tax Assessment 4.74
Act 1936 (ITAA 1936), Subdivision 960-Q and subsection 995-1(1)
of the ITAA 1997 and section 40-340 of the Income Tax
(Transitional Provisions) Act 1997
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