BILLS DIGEST NO. 104, 2016–17              31 May 2017

Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2017

Paula Pyburne
Law and Bills Digest Section 

Date introduced:  25 May 2017

House:  House of Representatives

Portfolio: Treasury

Commencement: Sections 1–3 and items 12 and 13 of Schedule 1 on Royal Assent; items 1–11 of Schedule 1 on the first 1 January, 1 April, 1 July or 1 October after Royal Assent.

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

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

All hyperlinks in this Bills Digest are correct as at May 2017.

Purpose of the Bill

The purpose of the Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2017 (the Bill) is to amend the Income Tax Assessment Act 1997 (ITAA 1997), the Income Tax (Transitional Provisions) Act 1997 (Transitional Provisions Act) and the Tax Laws Amendment (Small Business Measures No. 2) Act 2015 (2015 Small Business Measures Act) to implement the 2017–18 Budget announcement relating to accelerated depreciation arrangements for small business.

In the 2015–16 Budget, the Government increased the small business immediate deductibility threshold from $1,000 to $20,000 from 12 May 2015 until 30 June 2017.[1] The Bill extends that measure by 12 months until 30 June 2018, after which the deductibility threshold will revert to $1,000.

Background

Policy announcement and related measures

The changed depreciation arrangements for small business were initially announced as part of the 2015–16 Budget[2] as part of a broader ‘Growing Jobs and Small Business’ 2015–16 Budget package.[3] At that time, small businesses were defined as having an aggregate annual turnover of less than $2 million.

In the 2017-18 Budget, the Treasurer, Scott Morrison, announced that the Government would extend the measure by 12 months to 30 June 2018 for businesses with aggregated annual turnover of less than $10 million.[4]

According to the Treasury budget paper:

Small businesses will be able to immediately deduct purchases of eligible assets costing less than $20,000 first used or installed ready for use by 30 June 2018. Only a few assets are not eligible (such as horticultural plants and in-house software).

Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool (the pool) and depreciated at 15 per cent in the first income year and 30 per cent each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).

The current ‘lock out’ laws for the simplified depreciation rules (these prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out) will continue to be suspended until 30 June 2018 …

From 1 July 2018, the immediate deductibility threshold and the balance at which the pool can be immediately deducted will revert back to $1,000.[5]

Depreciation

In economic terms, depreciation generally refers to the actual pattern of decline in the value of assets as they age, whether due to obsolescence, physical deterioration, or the fact that they have a finite life.[6] Measuring economic depreciation can be complex and can involve, for example, consideration of the changes in the real market value of the asset. In order to avoid distortions in investment decisions, tax depreciation should mirror this change in value.[7]

The ITAA 1997 defines a depreciating asset as an asset that has a limited effective life and that is reasonably expected to decline in value over the time it is used.[8] It sets out the types of assets that can be depreciated and how the ‘cost’ of the depreciating asset is measured.[9] In general terms, depreciation in the tax system is largely based on the effective life of an asset as self-assessed by the taxpayer or as determined by the Commissioner of Taxation.[10] Where these methods approximate economic depreciation any distortions to investment decisions can be minimised.

Impact of accelerated depreciation

Accelerated depreciation arrangements provide that a taxpayer can ‘bring forward’ the period(s) over which an asset is depreciated. This may be by way of:

•       a specified reduction in the period(s) over which an asset is depreciated compared to the periods which would have been used with reference to the effective life of an asset or

•       by enabling the cost of the asset to be deducted in its entirety in a single tax period.

By bringing forward the depreciation expense related to an asset, ‘tax is deferred during the early years of an asset’s useful life’ and increases in later years.[11] The benefit to the taxpayer is confined to the deferral of tax. ‘In after tax terms, accelerated depreciation increases the net present value of an investment, or its rate of return, above what it would have been in the absence of accelerated depreciation.’[12]

Accelerated depreciation arrangements involve a cost to government revenue in the initial period(s) for which the accelerated arrangements apply. Such arrangements are ‘equivalent to the government providing an interest free loan to the taxpayer as revenue collections are lower in the early years but this is entirely offset in later years’.[13]

One potential economic impact of these arrangements is to distort decisions about the timing of investments and to encourage uneconomic investment—although these effects are influenced by the rate of inflation, the tax status of an entity and the marginal tax rate of the investor.[14] From an economy-wide perspective, accelerated depreciation can provide significant benefits to capital intensive industries while being of little benefit to service industries.[15] In examining different policy options to assist different industries and businesses, a comparison could be drawn with the impact of alternative measures, such as a change in the overall company tax rate.

Why have accelerated depreciation?

There are a number of policy reasons that have supported the use of accelerated depreciation. According to the second discussion paper which preceded the final report of the Review of Business Taxation (known as the Ralph review), they include:

•       industries using assets eligible for accelerated depreciation may produce externalities, such as benefits for other industries, the introduction of new technology, or other benefits not directly accruing to owners

•       investments in wasting assets are inherently riskier than other investments and so accelerated depreciation is justified as a rough tax offset for other tax system biases against risk and

•       other countries provide such concessions and so we need to match them in order to remain internationally competitive.[16]

Other rationales that have been used to justify accelerated depreciation or special tax treatment for small business have included:

•       as a rough compensation for the impact of inflation for businesses utilising straight line depreciation[17]

•       as a policy tool to stimulate investment and broader demand in the economy[18]

•       to simplify taxation compliance arrangements for small business or to overcome market imperfections for access to capital.[19]

Rationale for proposed accelerated depreciation measures

The rationale for the proposed accelerated depreciation measures are included in the Minister’s second reading speech for the Bill[20] and in the regulation impact statement in the Explanatory Memorandum.[21] In particular, the Explanatory Memorandum states:

Small businesses contribute in many ways to the Australian economy, but they often deal with various operational challenges including cash flow problems and disproportionately higher compliance burdens.

Extending accelerated depreciation for small business entities for an extra 12 months will continue to stimulate small business investment and growth by providing cash flow benefits and reducing red tape.[22]

The regulation impact statement considers three options being:

•       no change—so that small businesses would go back to only being able to claim an immediate tax deduction for asset purchases that cost less than $1,000 from 1 July 2017

•       extending the immediate deductibility threshold of $20,000 until 30 June 2018—being the preferred option and

•       extending the immediate deductibility threshold until 30 June 2018 but decreasing it to $15,000.

The enactment of the Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 operates to significantly expand the definition of small business entity in the ITAA 1997. It does this by increasing the maximum aggregated turnover for a small business entity in a financial year from $2 million to $10 million. That being the case, the second option was chosen as it will provide access to the concession to an additional 90,000 businesses.[23]

Committee consideration

The Bill has been referred to the Senate Economics Legislation Committee for inquiry and report by 13 June 2017.[24] However, the Committee met in private session on 29 May 2017 to consider the provisions of the Bill and, by unanimous decision, has determined that there are no substantive matters that require examination.[25]

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

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[26]

Policy position of non-government parties/independents

Little has been said about this measure. Mr Shorten did not refer to it in his budget-reply speech.[27]

In the lead up to the 2016 Federal Election, the Australian Greens (the Greens) pledged to stand up for small business by, amongst other things, increasing the ‘small business entity turnover threshold from an annual turnover of no more than $2 million per annum, to an annual turnover of no more than $10 million per annum’ and by supporting the ‘$20,000 instant asset write-off’.[28]

Position of major interest groups

In its 2017–18 pre-budget submission, the Australian Chamber of Commerce and Industry (ACCI) argued that the 2017–18 Budget could help small businesses to grow and employ if it contained measures to extend accelerated depreciation for small businesses with turnover up to $10 million for two years.[29] ACCI recommended that, given the delay in implementing the Enterprise Tax Plan Bill:[30]

… the Government extend the accelerated depreciation policy for small businesses up to $10 million turnover for 2 years from mid-2017 to mid-2019. The success of extending the asset writeoff value from $1,000 to $20,000 is testament to a well-targeted targeted policy that can boost business investment and increase the competitiveness of businesses. To ensure that the policy is relevant and effective, the Australian Chamber recommends that a review of the program including its uptake, impact and cost to tax revenue be undertaken around June 2018.[31]

Prior to the 2017–18 Budget, the Council of Small Business Organisations of Australia (COSBOA) stated that the $20,000 instant asset write-off is an important policy to all small businesses.[32] In addition:

To further free-up finances and encourage small business owners to invest in modernisation or more employees, the Government should backdate the $20,000 amount. It should apply to all to items that remain on a small business’ balance sheet which were purchased by the small business before it was introduced in 2015.[33]

Financial implications

The Explanatory Memorandum states that the financial impact of the measure proposed by the Bill over the four years to 2020–21 is $650 million (Table 1).

Table 1: financial impact of accelerated depreciation arrangements for small business entities and primary producers as proposed by the Bill ($ million)

2016–17

2017–18

2018–19

2019–20

2020–21

Total

nil

Not zero but rounded to zero

-$950m

$50m

$250m

-$650m

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

Key issues and provisions

Under the ITAA 1997 a business will be a small business entity in the current financial year if:

•       it is carrying on a business in the current year and

•       one or both of the following applies:

–      in the previous year before the current year the aggregated turnover of the business was less than $10 million

–      the aggregated turnover for the current year is likely to be less than $10 million.[34]

Small business entities have access to a number of existing tax concessions, including capital gains tax concessions and simplified depreciation arrangements.

Currently a small business entity can choose to use simplified depreciation arrangements which operate so:

•       up until 30 June 2017, assets costing up to $20,000 can be deducted in the income year in which they are purchased[35]

•       assets costing more than $20,000 can be included in a ‘general small business pool’ which has depreciation applied at a 15 per cent rate in the first income year and 30 per cent rate thereafter to the pooled assets, rather than be individually depreciated.[36] When the value of the pool is less than the $20,000 threshold, the entire amount can be deducted in the income year.[37]

These were considered to be temporary measures which were due to cease on 30 June 2017 at which time the deductible amount would reset to $1,000.

In addition the ‘lock out rule’ under which a taxpayer who chooses to apply these simplified arrangements in one income year and does not choose it in a later income year cannot choose to use these simplified arrangements for a period of five years is suspended and will continue to be suspended until 30 June 2018.

Items 1–7 of Schedule 1 to the Bill amend the notes at the end of relevant paragraphs in Subdivision 328D of the ITAA 1997 to specify that the threshold is $20,000 for assets that are first acquired between 12 May 2015 and 30 June 2018—thereby extending the current end date by 12 months.

Items 8–11 and 12–13 of the Bill make consequential amendments to the Transitional Provisions Act and 2015 Small Business Measures Act respectively.

Concluding comments

Accelerated depreciation arrangements have been used for a number of reasons in the tax system. The proposed measures for small business are designed to provide incentives to invest and stimulate economic activity.

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[1].              K Swoboda and R Dosser, Tax Laws Amendment (Small Business Measures No. 2) Bill 2015, Bills digest, 117, 2014–15, Parliamentary Library, Canberra, 28 May 2015.

[2].              Australian Government, Budget measures: budget paper no. 2: 2015–16, p 19.

[3].              T Abbott (Prime Minister), J Hockey (Treasurer) and B Billson (Minister for Small Business), Growing jobs and small business package to help small businesses invest more, grow more, and employ more, joint media release, 12 May 2015.

[4].              S Morrison (Treasurer), Budget 2017: stronger growth to create more and better paying jobs, media release, 9 May 2017.

[5].              Australian Government, Budget measures: budget paper no. 2: 2017–18, pp. 21–22.

[6].              H Sanders and R Weiss, ‘Analysis of the economic and tax depreciation of structures’, Tax Management Real Estate Journal, 16(12), 6 December 2000, pp. 343–355, ProQuest database.

[7].              Ibid., p. 347.

[8].              ITAA 1997, section 40-1.

[9].              ITAA 1997, section 40-10.

[10].              ITAA 1997, section 40-95. The ITAA 1997 uses the term ‘capital allowances’ to describe depreciation in some parts.

[11].              JT Ralph, A platform for consultation: discussion paper 2: building on a strong foundation, (Ralph report), Review of Business Taxation, Canberra, February 1999, paragraph 2.1, p. 117.

[12].              Ibid., paragraph 2.2.

[13].              Ibid., paragraph 2.4.

[14].              M Benge, ‘Taxes and investment decisions’, in J Head (ed), Fightback: an economic assessment, papers from a conference organised by the public sector management institute, Monash University, Australian Tax Research Foundation, 1993, pp. 171–192.

[15].              Ralph report, op. cit., paragraph 2.9, p. 118.

[16].              Ibid., paragraph 2.14, p. 119.

[17].              Y Margalioth, ‘Not a panacea for economic growth: the case of accelerated depreciation’, Virginia Tax Review, 26(3), 2007, pp 493–518 at p. 509, accessed 7 June 2015.

[18].              Ibid.

[19].              Organisation for Economic Cooperation and Development (OECD), Taxation of SMEs: key issues and policy considerations, OECD Tax Policy Studies, 18, pp. 85 and 94.

[20].              M McCormack (Minister for Small Business), ‘Second reading speech: Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2017’, House of Representatives, Debates, (proof), 25 May 2017, p. 5.

[21].              Explanatory Memorandum, Treasury Laws Amendment (Accelerated Depreciation for Small Business) Bill 2017, pp. 13–19.

[22].              Ibid., pp. 3–4

[23].              Ibid., p. 16.

[24].              Details or the terms of reference, the submissions to the Senate Economics Legislation Committee and the final report are available on the inquiry homepage.

[25].              Senate Standing Committee on Economics, Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2017 [Provisions], The Senate, Canberra, May 2017.

[26].              The Statement of Compatibility with Human Rights can be found at page 12 of the Explanatory Memorandum to the Bill.

[27].              B Shorten, ‘Second reading speech: Appropriation Bill (No. 1) 2017–2018’, House of Representatives, Debates, (proof), 11 May 2017, p. 88.

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

[29].              Australian Chamber of Commerce and Industry (ACCI), Submission to Treasury, 2017–18 pre-Budget submissions, January 2017, submission 1, p. 6.

[30].              The Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016, which became the Treasury Laws Amendment (Enterprise Tax Plan) Act 2017, was introduced into Parliament on 1 September 2016 and passed both Houses on 9 May 2017. It received Royal Assent on 19 May 2017.

[31].              ACCI, Submission to Treasury, op. cit., p. 18.

[32].              Council of Small Business Australia, Submission to Treasury, 2017–18 pre-Budget submissions, January 2017, p. 7.

[33].              Ibid.

[34].              ITAA 1997, subsection 328-110. Note that this subsection was amended by item 15 in Part 1 to Schedule 3 of the Treasury Laws Amendment (Enterprise Tax Plan) Act 2017, but that the amendments have not yet been incorporated into the current version of the ITAA 1997 on the Federal Register of Legislation.

[35].              ITAA 1997, section 328-180.

[36].              ITAA 1997, sections 328-185 (pooling) and 328-190 (calculation of depreciation).

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