Chapter 1


Introduction and overview of the bill

1.1        On 15 September 2016, the Senate referred the provisions of the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 (the bill) to the Senate Economics Legislation Committee for inquiry and report by 10 October 2016.

1.2        The bill makes a number of amendments to tax legislation to implement the government's 2016–17 Budget commitment to progressively reduce company tax rates for small and large companies over the next decade—the 'Ten Year Enterprise Tax Plan'. The measures in the bill include:

  • an immediate reduction in the corporate tax rate to 27.5 per cent for the  2016–17 tax year for small businesses—that is, corporate tax entities with an aggregated turnover of less than $10 million;
  • a progressive extension of the above reduction in the corporate tax rate to all corporate tax entities by the 2023–24 income year, and in turn progressive reductions in the corporate tax rate to 25 per cent from 2026–27;
  • consequential amendments to the dividend imputation arrangements to adjust imputation credits as the company tax rate changes;
  • a progressive increase in the tax discount for unincorporated small businesses that is equivalent to the above reductions in the corporate tax rate; and
  • an increase in the aggregated turnover threshold for access to small business tax concessions from $2 million to $10 million.

1.3        In his second reading speech, the Treasurer, the Hon Scott Morrison MP, explained that the bill:

...forms a key component of the government's reform agenda to improve Australia's tax system for businesses and to drive investment in our economy as it transitions from the investment phase of the mining boom, as it is successfully doing, to broader based growth.[1]

Conduct of the inquiry

1.4        The committee advertised the inquiry on its website and social media, and wrote directly to a range of individuals and organisations inviting written submissions by 23 September 2016. The committee received 29 submissions, which are listed at Appendix 1. The committee thanks all groups and individuals who took the time to make a written submission.

1.5        The committee did not hold any public hearings for this inquiry.

Overview of the bill

Reducing the corporate tax rate

1.6        Schedule 1 to the bill amends the Income Tax Rates Act 1986 (ITAA 1986) to reduce the corporate tax rate to 27.5 per cent for the 2016–17 income tax year for corporate tax entities that are small businesses—that is, corporate tax entities with an aggregated turnover of less than $10 million.

1.7        The bill also progressively extends the lower corporate tax rate to all corporate tax entities by 2023–24. The rate will then be cut to:

  • 27 per cent for the 2024–25 income year;
  • 26 per cent for the 2025–26 income year; and
  • 25 per cent for the 2026–27 income year and later income years.

1.8        The progressive reductions in the corporate tax rate, and the extension of the lower tax rates to all corporate tax entities, is shown below in Table 1. 

Table 1: Summary of changes to the corporate tax rate

Income year Turnover threshold Tax rate for companies under threshold (%) General corporate tax rate (%)

2015–16

$2 million

28.5

30

2016–17

$10 million

27.5

30

2017–18

$25 million

27.5

30

2018–19

$50 million

27.5

30

2019–20

$100 million

27.5

30

2020–21

$250 million

27.5

30

2021–22

$500 million

27.5

30

2022–23

$1 billion

27.5

30

2023–24

Threshold removed

27.5

2024–25

n/a

27

2025–26

n/a

26

2026–27

n/a

25

Source: Table based on information in Explanatory Memorandum, p. 11.

1.9        The Explanatory Memorandum explains that Australia's corporate tax rate is currently one of the highest in the world and significantly above the OECD average. The reductions in the bill will encourage investment, economic growth and job creation, and 'make Australian companies more internationally competitive in a tough global market place'.[2] The Explanatory Memorandum further suggests this will 'result in higher living standards for Australians and an expected permanent increase in the size of the economy of just over one per cent in the long term'.[3]

Operation of the imputation system

1.10      Under Australia's dividends imputation system, where a corporate tax entity distributes profits to its members, and where income tax has already been paid on those profits—such as when a company pays a dividend to its shareholders—they have the option of passing on, on 'imputing', credits for the tax. This is known as 'franking' the distribution, and franking credits are attached to the distribution and can be used by the recipients as tax offsets. As the Australian Tax Office explains:

Although the recipients are taxed on the full amount of the profit represented by the distribution and the attached franking credits, they are allowed a credit for the tax already paid by the corporate tax entity.

This prevents double taxation – that is, the taxation of profits when earned by a corporate tax entity, and again when a recipient receives a distribution.[4]

1.11      Currently, the maximum franking credit that can be allocated to a frankable distribution is based on the headline corporate tax rate of 30 per cent for all corporate tax entities. For the purpose of aligning the franking rate with the proposed reductions in the corporate tax rate and the gradual extension of the lower rate to all corporate entities, schedule 4 of the bill provides for a 'corporate tax rate for imputation purposes'. This is generally defined to mean the entity's corporate tax rate for the current income year, but worked out on the assumption that the entity's aggregated turnover for the income year is equal to its aggregated turnover for the previous income year.[5] As the Explanatory Memorandum explains:

...from the 2016–17 income year, the operation of the imputation system for corporate tax entities will be based on the company's corporate tax rate for a particular income year, worked out having regard to the entity's aggregated turnover for the previous income year. This is necessary because corporate tax entities usually pay distributions to members for an income year during that income year. However, a corporate tax entity will not know its aggregated turnover for a particular income year (and therefore its corporate tax rate for that income year) until after the end of the income year.[6]

Increase to the tax discount for unincorporated small businesses

1.12      The small business income tax offset was introduced in 2015–16 as part of a range of tax measures intended to help small business. It entitles individuals who are small business entities, or who are liable to pay income tax on a share of the income of a small business entity, to a tax offset equal to 5 per cent of their basic income liability that relates to their total net small business income, capped at $1000.[7]

1.13      The offset was introduced to provide unincorporated small businesses with a tax discount broadly equivalent to the 1.5 per cent reduction in the small business company tax rate introduced in 2015–16. For the same reason, the current bill increases the offset rate alongside decreases in the corporate tax rate, and thereby 'minimises tax distortions between the different entity types through which small businesses may be run, and ensures that the many small businesses run through unincorporated entities also receive an increase in their cash flow'.[8]

1.14      Specifically, schedule 2 to the bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to increase the small business income tax offset to 16 per cent of net small business income by the 2026–27 income year. As set out in the Explanatory Memorandum, the rate of the offset will rise from 5 per cent in 2015–16 to 16 per cent in 2026–27 as follows:

  • For the 2016–17 to 2023–24 income years, the offset is 8 per cent of net small business income.
  • For the 2024–25 income year, the offset is 10 per cent of net small business income.
  • For the 2025–26 income year, the offset is 13 per cent of net small business income.[9]

1.15      These changes will help address the fact that reductions to the corporate tax rate do not provide a tax cut for those businesses that are not operated through a company. There are approximately 2.3 million businesses—accounting for around 70 per cent of small businesses—in this category.[10]

Increase to the small business entity threshold

1.16      Schedule 3 to the bill amends the ITAA 1997 to increase the aggregated turnover threshold for access to certain small business tax concessions from $2 million to $10 million. The Explanatory Memorandum explains that the aggregated turnover threshold for access to the small business income tax offset will be limited to $5 million, and the current $2 million threshold will be retained for the small business capital gains tax concessions.

1.17      According to the Explanatory Memorandum, the increase in the aggregated turnover threshold will 'allow an additional 90 000 to 100 000 businesses to access the benefits of the small business tax concessions'.[11] 

Financial impact

1.18      The revenue implications of the amendments over the forward estimates period is set out in below in Table 2.[12]

Table 2: Financial impact (as set out in Explanatory Memorandum)

2016–17 2017–18 2018–19 2019–20

-$400m

-$500m

-$800m

-$950m

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