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 (SIMPLIFIED GST ACCOUNTING) 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 Simplified accounting methods -- extending
availability ...................................................................... 5
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
Commissioner Commissioner of Taxation
GST Act A New Tax System (Goods and Services Tax)
Act 1999
GST goods and services tax
1
General outline and financial impact
Simplified accounting methods -- extending availability
This Bill amends the A New Tax System (Goods and Services Tax)
Act 1999 to enable the Commissioner of Taxation to extend simplified
goods and services tax accounting methods to more small businesses and
other entities with an annual turnover of less than $2 million.
Date of effect: These amendments are to apply from 1 July 2007.
Proposal announced: This measure was announced in the
Treasurer's Press Release No. 038 of 8 May 2007.
Financial impact: These amendments will have these revenue
implications:
2007-08 2008-09 2009-10 2010-11
GST $1m $2m $2m $2m
Income tax Nil $1m $1m $1m
Compliance cost impact: There may be some minor transitional
compliance costs for eligible businesses as they initially adopt the new
simplified accounting methods. However, on an ongoing basis, the
simplified accounting methods are expected to reduce their compliance
costs.
3
Chapter 1
Simplified accounting methods --
extending availability
Outline of chapter
1.1 This Bill amends the A New Tax System (Goods and Services
Tax) Act 1999 (GST Act) to assist in reducing the compliance costs of
small businesses.
1.2 These amendments allow the Commissioner of Taxation
(Commissioner) to determine simplified accounting methods in writing.
These can be made for small businesses and other entities with an annual
turnover of less than $2 million, that make a mix of taxable and GST-free
supplies, or that acquire a mix of supplies that are taxable and GST-free
for the suppliers (mixed inputs).
Context of amendments
1.3 The GST law requires businesses that make mixed (taxable and
GST-free) supplies or have mixed inputs to establish whether the
particular supplies or acquisitions are taxable or GST-free when preparing
their business activity statement. This ensures that affected businesses
remit the correct amount of goods and services tax (GST) and also claim
the correct amount of input tax credits.
1.4 Businesses incur compliance costs in seeking to distinguish
between taxable and GST-free supplies. Similarly, they bear compliance
costs in accounting for input tax credits where they have mixed inputs.
1.5 Division 123 of the GST Act allows the Commissioner to
determine simplified accounting methods for retailers (ie, business entities
that sell goods to people for their private use or consumption):
· that sell food; or
· that make supplies that are GST-free under the GST
concession for charities.
5
1.6 The existing simplified accounting methods provide eligible
small retailers with alternative methods for working out their GST
liability. These methods remove the need to establish whether particular
supplies are taxable or GST-free and whether particular acquisitions are
creditable, or are not because they relate to the acquisition of supplies that
are GST-free.
1.7 This Bill seeks to extend the class of entities for whom the
Commissioner can determine simplified accounting methods. These
amendments benefit small businesses and other entities with an annual
turnover of less than $2 million that either make mixed supplies or have
mixed inputs. It is envisaged that extending the availability of simplified
accounting methods to more small businesses and other entities will
reduce their compliance costs on an ongoing basis.
Summary of new law
1.8 This Bill amends the GST Act to allow the Commissioner to
determine simplified accounting methods for businesses and other entities
with an annual turnover of less than $2 million that make mixed supplies
or have mixed inputs.
Comparison of key features of new law and current law
New law Current law
The Commissioner can determine The Commissioner can determine
simplified accounting methods for simplified accounting methods for
businesses and other entities with an retailers who sell food, or who make
annual turnover of less than supplies that are GST-free under the
$2 million that make mixed supplies GST concession for charities.
or have mixed inputs or both mixed
supplies and mixed inputs. The
Commissioner can continue to
determine simplified accounting
methods for retailers and charities.
Detailed explanation of new law
1.9 This Bill is intended to reduce the GST compliance costs for
small businesses by extending the availability of simplified accounting
methods to businesses and other entities with an annual turnover of less
than $2 million that make mixed supplies or have mixed inputs. Where a
business or other entity chooses to follow a simplified accounting method
that applies to them they can calculate their net amount for GST purposes
based on the method. [Schedule 1, items 5, 7, 8 and 13, paragraphs 123-5(1)(a)
and (b), section 123-7, paragraph 123-10(1)(aa), subsection 123-15(1)]
1.10 An important precondition is that an entity must, as part of its
enterprise, make a mix of both taxable supplies and supplies that are
GST-free. Alternatively, an entity will also potentially qualify for a
simplified accounting method if, as part of its enterprise, it has a mix of
creditable acquisitions and acquisitions that are not creditable because the
acquisitions made by the entity were GST-free supplies. This requirement
ensures that simplified accounting methods are only potentially available
to entities that need to adjust the amount of GST remitted or input tax
credits claimed because of the impact of making GST-free supplies or
having acquisitions of supplies that are GST-free. Despite this, if a small
enterprise entity qualifies under the above criteria, the Commissioner may
choose to make a determination that applies more broadly. Such a
determination, whilst applying to taxable and GST-free supplies, could
also apply to input-taxed and out of scope transactions and similarly to
acquisitions of such supplies. [Schedule 1, item 6, subsection 123-5(3)]
1.11 This Bill extends the existing operation of Division 123 to
entities that either carry on a business or conduct an enterprise that does
not constitute a business. In order to qualify, a business must be a small
business entity for the year of income or alternatively an entity that does
not carry on a business but meets the $2 million `small enterprise turnover
threshold' in Division 188 of the GST Act. This ensures that all GST
registered entities that meet the qualifying criteria can potentially access a
simplified accounting method. [Schedule 1, items 7, 15 and 17, section 123-7,
paragraph 188-10(3)(ba) and the definition of `small enterprise turnover threshold' in
section 195-1]
1.12 Under these amendments, the Commissioner can make
determinations for qualifying small enterprise entities. The definition of
`small enterprise entity' is inserted in the Dictionary in Division 195 of
the GST Act [Schedule 1, item 16, definition of `small enterprise entity' in
section 195-1]. Under the definition both of the following qualify as small
enterprise entities:
· a small business entity; and
· an entity that does not carry on a business but has an annual
turnover that does not exceed $2 million as calculated under
the GST turnover test in Division 188.
1.13 However, a business that only qualifies as a small business
entity because its turnover as worked out at the end of the year of income
(but not at the beginning of the year of income), is less than the $2 million
threshold, is excluded from eligibility for a simplified accounting method.
This reflects that the small business entity test has been designed to allow
entities to access various income tax concessions. Accordingly, it is
appropriate that businesses be able to, as an alternative, establish at the
end of a year of income whether they qualified as a small business entity
for income tax purposes. This recognises that businesses will not lodge
their tax return until some period after the end of the income tax year. In
contrast, entities need to account for GST on a real time basis and
therefore need certainty about how to treat transactions for the next tax
period. The `small business entity' definition accordingly only allows the
turnover of the entity to be worked out at the start of the financial year.
[Schedule 1, item 7, section 123-7]
1.14 A small enterprise entity cannot choose to apply a simplified
accounting method within 12 months after revoking an earlier decision to
apply a simplified accounting method. Similarly, a small enterprise entity
cannot revoke a choice within 12 months of making the choice to apply
the simplified accounting method. This ensures that entities do not
continuously change the particular simplified accounting method that they
have chosen in order to reduce their net amount. Similarly, a small
enterprise entity cannot choose to apply two different simplified
accounting methods concurrently. [Schedule 1, items 8 to 10,
paragraphs 123-10(1)(aa) and (b) and paragraphs 123-10(2)(b) and (ba)]
1.15 Small enterprise entities that have applied a simplified
accounting method available to them, can no longer apply the simplified
accounting method from the start of the tax period after the entity ceases
to be a small enterprise entity. Similarly, if a retailer has chosen to apply
a simplified accounting method for retailers, then once it ceases to be a
retailer it must cease to apply the simplified accounting method from the
start of the tax period after the entity ceased to be a retailer. [Schedule 1,
items 11 and 12, paragraphs 123-10(4)(a) and (aa)]
1.16 Small enterprise entities are those for which their annual
turnover and the turnover of connected entities and affiliates is less than
$2 million.
1.17 These amendments establish a framework under which the
Commissioner can determine simplified accounting methods for
calculating GST liabilities. The Commissioner will take into account the
impact on entities and tax system integrity considerations in establishing
the final scope and qualifying conditions for the simplified accounting
methods.
1.18 These amendments allow the Commissioner to make
determinations for particular classes of small enterprise entities that will
be able to use the simplified accounting methods. It is not generally
intended that the Commissioner would make specific determinations for
individual entities.
Example 1.1
John carries on a small business as a widget manufacturer. He sells
widgets to retailers in Australia and also exports widgets to distributors
in overseas markets. As he makes mixed supplies he can apply to the
Commissioner to use a simplified accounting method that applies to a
class of entities in calculating his GST liability on supplies that he
makes.
1.19 Small businesses that have mixed inputs and can apply a
simplified accounting method will no longer need to identify the GST
status of each input. Instead, they can apply a ratio to their total inputs.
Example 1.2
Camille carries on a small business, running a child care centre. She
acquires basic food items GST-free in order to supply morning tea,
lunch and afternoon tea to children in her care. She also acquires a
range of products that are creditable acquisitions. As she has mixed
acquisitions, in calculating her entitlement to input tax credits she can
apply to the Commissioner to use a simplified accounting method that
applies to a class of entities to which her business is a member.
Camille will no longer need to identify whether each of her
acquisitions is GST-free or taxable. Instead, she will apply a ratio to
determine for what portion of her acquisitions she can claim an input
tax credit.
Application and transitional provisions
1.20 These amendments apply from 1 July 2007. [Schedule 1, item 18]
Consequential amendments
1.21 With the extension of Division 123 to include `small enterprise
entity', references in other tables in the GST Act and the heading and
summary of operation in Division 123 that refer to retailers, have been
updated to also include a reference to `small enterprise entity'. [Schedule 1,
items 1 to 4, sections 17-99, 37-1 and 123-1]
11
Index]
[Search]
[Download]
[Bill]
[Help]