Coalition Senators' additional comments

1.1Coalition Senators support the measures in this Treasury omnibus bill, but have recommendations pertaining to certain schedules.

Schedule 1 – Instant Asset Write-off

1.2Coalition Senators note that the former government provided extensive support for 3.6 million small and medium businesses, which employ almost 8 million Australians. This included tax relief to support investment and reduce costs; energy programs and initiatives to reduce power bills; and providing billions in support to keep small businesses open and Australians in jobs during the COVID-19 pandemic.

1.3This included a Temporary Full Expensing (TFE) measure which was introduced in the October 2020 budget, “enabling businesses with turnover of up to $5 billion to claim an immediate tax deduction for the full cost of eligible depreciable assets in the year of purchase or installation.”[1] In their submission to this Inquiry, the Australian Chamber of Commerce and Industry (ACCI) noted that during the pandemic, “the recovery in business investment was driven in part by the TFE measure” and that “ non-mining business investment in eligible assets increased 39 per cent between the September quarter of 2020 and the December quarter of 2021, and remained elevated through 2022” off the back of the measure.[2] However, they are concerned that this improved level of business investment may not be sustained under Labor’s proposed InstantAssetWrite Off (IAWO).[3]

1.4As part of the 2019-20 budget, the Coalition extended the IAWO to eligible businesses with up to $50 million in aggregated turnover, to a threshold of up to $30,000. The Albanese Government’s proposed IAWO in Schedule 1 has significantly lower thresholds.

1.5Several submitters to the inquiry have called for an increase to the IAWO thresholds and extending it to medium enterprises. The National Electrical and Communications Association said that “a higher threshold would enable SMEs to immediately recover a more significant portion of their capital investments.”[4]Furthermore, “increased thresholds for eligible businesses, will further stimulate the economy and support job creation”.[5]

1.6National Electrical and Communications Association (NECA) informed the Committee about some types of assets which would not be eligible under the Government’s thresholds:

Some of the higher end instruments that I just referred to—the power quality analyser, on the pricing that I've got, comes in just under $20,000, but the thermal imaging cameras are $22,500. But a more hardware-type item, such as a compact truck mounted EWP, which are used by quite a lot of our members and provide basic network approved services for customers, is within the range of $20,000 to $50,000 as well, without the truck.[6]

1.7During the public hearing, NECA confirmed that they were not consulted on this measure and that this was the first time they had seen it.[7]

1.8In their submission, the Australian Automotive Dealer Association (AADA) said there were 600 new car Dealers in Australia that operate 3300 dealerships, which range from “family-owned small businesses” to larger businesses.[8]These businesses “employ more than 55000 people directly with a total economic contribution of over $17 Billion”.[9]

1.9The AADA said that their members could be excluded as they would have a turnover higher than $10 million:

New car dealers would be excluded from the scheme, and that is due to the high value of the product that they are selling, so there is a higher turnover. However, these are mostly small and family-run businesses, but, due to the product they sell being quite expensive, they mostly would be excluded.[10]

1.10Furthermore, they told the Committee that “under the current regime there are limited investment incentives available for Dealers, due to the turnover thresholds. While Dealers generally fall outside of commonly used definitions of small or medium sized businesses due to employee count or turnover, Dealers are often family run businesses which operate a vital function in the sale, servicing and repair of vehicles in the community”.[11]

1.11Noting that investments in substantial new facilities to drive productivity and economic activity “are much more likely to occur if all Dealers have access to investment incentives”, the AADA have argued for a “higher threshold and for the scheme to be made available to a wider range of businesses”.[12]

1.12In their submission, Energy Consumers Australia recommend that a higher threshold is considered, noting that:

This will provide a greater incentive for businesses to consider and install energy efficient equipment, particularly when weighed against the time and complexities often associated with installing new equipment.[13]

1.13Energy Consumers Australia said that their surveys showed “60 per cent of small-business owners stated that, if the government provided more financial incentives, this would encourage them to do more to reduce their businesses' energy use” through energy efficient investments.[14] They noted that the Government's $20000 threshold “is a bare minimum in terms of what small businesses could, should and would want to be spending.”[15]

1.14Having a viable IAWO policy is crucial if we are to arrest the decline in productivity over the last year. In the year to June 2023, ABS data reveals that productivity has declined by 3.6 per cent.[16] ACCI emphasised the importance of incentivising business investment for improving productivity:

Business investment is a catalyst for productivity growth and major driver of economic activity. It allows for the purchase of things such as new technologies, which boosts productivity through skills development and innovation. Greater investment in new capital assets is needed to lift and sustain productivity growth and raise economic activity over the next decade.[17]

1.15Consequently, ACCI has argued that the Government “increase the eligible amount to $30000, for businesses with an aggregated turnover of $50 million”, which would “encourage businesses to bring forward investments on larger items that will provide a greater contribution to productivity growth.”[18] They further noted that an earlier iteration of the policy, which was the Coalition’sIAWO from FY 2019-20, had these thresholds “which opened the incentive to medium-sized businesses as well”.[19]The proposed threshold, ACCI notes, “may not be sufficient to generate the level of stimulus needed, with many assets exceeding this cost and therefore not eligible.”[20]This is because “it will not be sufficient for investment in equipment, plant and machinery, which are likely to provide more substantial productivity benefits.”[21]

1.16When asked at the public hearing, ACCI said that a $30000 threshold was a modest request of the majority of their members, recognising the need to balance the need for budget repair and the need to reduce business costs and improve productivity.[22]

1.17Submitting to the inquiry, the Consulting Surveyors National also argued that the Government “raise theincrease the instant asset write-off thresholdto$30000” which would “offer significant support to small businesses, encouraging and supporting them as they invest in more substantial assets and address the issues with rapid technological change”.[23]

1.18The body told the Committee they represent “500 surveying firms, employing thousands of professionals throughout Australia”, 70 per cent of which are small businesses.[24]

1.19Coalition Senators therefore recommend that the Bill be amended so that the value of assets eligible is extended to $30000. Furthermore, the turnover threshold should be increased to $50 million so that 25500 further businesses will be eligible for the IAWO.

1.20This will simplify depreciation for Australia’s 3.6 million small and medium businesses, cutting red tape while boosting investment in productive assets to improve their businesses, lower their costs, and in turn lower prices.

1.21This will drive productivity at a time it has experienced an historic collapse under Labor, which will drive economic growth to fund the essential services Australians deserve.

1.22This would restore the IAWO to the levels introduced in the 2019-20 budget. This aligns the eligibility with the 25 per cent small business company tax rate threshold, and Labor’s Small Business Energy Incentive measure.

1.23Coalition Senators note that when business owners can keep more of their own money, they are able to invest back into the business, boost productivity, grow the economy and create new and local jobs. This means businesses can invest in productive assets without putting pressure on inflation.

1.24Increase the Instant Asset Write-off threshold to $30000 and expand the eligibility to businesses with aggregated turnover of up to $50 million, which would restore the business investment incentive policy to 2019-20 levels.

Schedule 7 – Non-arm’s length expenses (NALE) of superannuation funds

1.25There was a uniform view from joint accounting bodies heard by the Inquiry that although Schedule 7 was an improvement to the NALE rules amendments, the overall provisions introduced in 2019 were unnecessary and punitive. On 22March 2022, the former Coalition Government announced intentions to make legislative changes to ensure the provisions operate as intended, noting concerns held by both APRA-regulated funds and SMSFs about the Australian Taxation Office’s (ATO's) interpretation of the provisions in ruling LCR 2021.[25]

1.26Submitting to this inquiry, the Institute of Financial Professional Australia (IFPA) argued there already was “a solution in place for low interest, no interest Limited resource borrowing arrangement (LRBA) loans before the NALE provisions were introduced.”[26]This, they argue, was in the form of ATO's Taxation Ruling TRF2010/1, which they believe would solve the integrity issue as undercharged loans would be considered excess contributions for tax purposes.[27]

1.27IFPA, along with other accounting bodies, have argued that the current non-arm’s length expenses (NALI) and NALE rules “result in a significant administrative cost across the sector” and that the tax consequences are “disproportionate”.[28]

1.28Regarding the Government’s proposed amendments, they submitted that “exempting large APRA-regulated funds tor both general expenses and specific expenses NALE but subjecting self-managed superannuation funds (SMSFs) and SAFs tor both general and specific expenses of the fund is unfair.”[29]By doing this, IFPA argues that the bill creates an unlevel playing field between Australian Prudential Regulation Authority (APRA) regulated funds and smaller funds and “does not promote tax neutrality/equality across the superannuation sector.”[30]

1.29A Joint Submission from Chartered Accountants Australia and New Zealand (CAANZ), CPA Australia, Institute of Public Accounts (IPA), SMSF Association and TheTaxInstitute (the Joint Submission) argued that the amendments entrench a ‘two-tiered’ superannuation sector into legislation:

The amendments in the Bill propose to introduce a differentiation between key sectors of the superannuation industry with respect to taxation. Exempting large APRA-regulated superannuation funds in relation to general and specific expenses within the NALI/E regime creates a dual tax regime, thereby entirely separating the treatment of different types of superannuation funds. This differential treatment raises concerns, particularly since the trustees of all superannuation funds are held to the same standard regarding legal obligations, such as the statutory best financial interests duty, common law fiduciary duties, and the sole purpose test, making the inconsistency in treatment questionable. We do not endorse the unnecessary, disparate treatment of superannuation funds.[31]

1.30The SMSF Association also argued that a non-neutral approach was unfair and inconsistent with standard policy:

The proposed amendments seek to treat some participants of the sector with an uneven hand. The express exclusion of large APRA funds lacks equity and sector neutrality. The lack of sector neutrality is inconsistent with existing measures and current Government policy proposals with regards to superannuation. A workable, legislative solution is needed for the whole superannuation sector. It is poor policy design to provide a commercial advantage to one segment of the market and then apply significant, punitive measures to another, on what is tantamount to the same behaviour.[32]

1.31In general, the SMSF Association has said that the amendments “will add to complexity, increase cost and create unnecessary red tape particularly for the SMSF sector”.[33]

1.32It was unclear during the Treasury’s appearance before the Committee why a judgement was made to pursue two distinct approaches for APRA-regulated funds and SMSFs. It was particularly unclear whether this judgement had been informed by proper consideration of the prevalence of non-compliance across the sector (see Box 1.1 below):

Source: Mr Adam Hawkins, Assistant Secretary, and Mr James Thompson, Director, Tax and Transfers Branch Department of the Treasury, Committee Hansard, 13 November 2023, p. 19.

1.33The Tax Institute gave evidence to the Committee that the apparent mischief this legislation seeks to address no longer exists following other legislative amendments and the ATO’s administrative approach:

Schedule 7 proposes to amend the non-arm's-length income rules contained in the Income Tax Assessment Act 1997. The NALI rules were originally introduced to address schemes where superannuation funds entered into arrangements where they derived more income than they would under arms-length arrangements. The rules were amended in 2019, and those amendments were specifically stated to have been introduced in response to certain arrangements, such as limited recourse borrowing arrangements. However, well-established and effective compliance levers already exist within the tax and super compliance framework to address the types of behaviours which the 2019 amendments—and now schedule 7—seek to address. Limited recourse borrowing arrangements effectively no longer exist in their previous form, owing to other legislative amendments and the ATO's administrative approach, which has been effective in addressing these concerns.[34]

1.34The Joint Submission of CAANZ, CPA Australia, IPA, SMSF Association and The Tax Institute provided an alternative to the Government’s approach which looks to be more proportionate and less disruptive. This was proposed to the Assistant Treasurer in February 2023.

1.35It was proposed that the 2019 amendments to sections 295-550 of the ITAA97 be repealed and returned to its terms before the amendments were enacted.[35]

1.36Further, if integrity concerns remain, it was proposed that section 109 of the SISAct be amended to prohibit trustees from conducting any transactions with any party other than on arm’s length terms.[36]This section of the SIS Act is a civil penalty provision which operates as an “operating standard”. All external auditors of SMSFs and APRA-regulated funds monitor the compliance with this section. If a breach is identified in an audit, the respective regulators have wide powers under the SIS Act to examine those cases and the appropriate penalties.

1.37It is clear that imposing a differentiation between key sectors of the superannuation industry with respect to taxation is the wrong approach. As the Institute of Public Accountants urged:

I've never seen so much commonality around all the professional bodies, basically saying that this is a bad law outcome because it creates unnecessary compliance.[37]

1.38The alternative proposed in the Joint Submission is a sensible solution to address any integrity concerns without placing an unnecessary burden on one sector of the superannuation industry.

1.39That the Government review the measure with consideration given to the alternative solution to the integrity concerns proposed by Chartered Accountants Australia and New Zealand, CPA Australia, Institute of Public Accountants, SMSF Association and The Tax Institute, through amendments to section 109 of the Superannuation Industry (Supervision) Act 1993 that prohibit trustees from conducting transactions not on arm’s length terms.

Footnotes

[1]ACCI, Submission 5, p. 2.

[2]ACCI, Submission 5, p. 2.

[3]ACCI, Submission 5, p. 3.

[4]NECA, Submission 1, p. 4.

[5]NECA, Submission 1, p. 4.

[6]Mr Neil Roberts, Director, Policy Technical Safety, NECA, Committee Hansard, 13 November 2023, p. 3.

[7]Mr Johns, NECA, Committee Hansard, 13 November 2023, p. 3.

[8]AADA, Submission 7, p. 1.

[9]AADA, Submission 7, p. 1.

[10]Ms Dimovski, AADA, Committee Hansard, 13 November 2023, p. 4.

[11]AADA, Submission 7, p. 2.

[12]AADA, Submission 7, p. 1.

[13]ECA, Submission 4, p. 2.

[14]Ms Liz Stephens, Director, Stakeholder Engagement, ECA, Committee Hansard, 13 November 2023, p. 6.

[15]Ms Boyd, ECA, Committee Hansard, 13 November 2023, p. 9.

[16]Australian Bureau of Statistics, Australian National Accounts: National Income Expenditure and Product, 6 September 2023, https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release.

[17]ACCI, Submission 5, pp. 1–2.

[18]ACCI, Submission 5, p. 3.

[19]ACCI, Submission 5, p. 3.

[20]ACCI, Submission 5, p. 3.

[21]ACCI, Submission 5, p. 3.

[22]Ms Heazlewood, ACCI, Committee Hansard, 13 November 2023, p. 7.

[23]CSN, Submission 8, p. 1.

[24]CSN, Submission 8, p. 1.

[25]Senator the Hon Jane Hume, Minister for Superannuation, Financial Services and the Digital Economy, ‘Government to ensure non-arm’s length expense provisions operate as intended’, Media Release, 22 March 2022 (available at: https://ministers.treasury.gov.au/ministers/jane-hume-2020/media-releases/government-ensure-non-arms-length-expense-provisions).

[26]IFPA, Submission 3, p. 2.

[27]IFPA, Submission 3, p. 2.

[28]IFPA, Submission 3, p. 3; IFPA, Submission 3.1, p. 1.

[29]IFPA, Submission 3, p. 3.

[30]IFPA, Submission 3, p. 3.

[31]Joint Submission, Submission 13, p. 2.

[32]SMSF Association, Submission 6, p. 3.

[33]SMSF Association, Submission 6, p. 1.

[34]Ms Julie Abdalla, Senior Counsel, Tax and Legal, The Tax Institute, Committee Hansard, 13November 2023, p. 10.

[35]Joint Submission, Submission 13, p. 29.

[36]Joint Submission, Submission 13, p. 29.

[37]Mr Anthony Greco, General Manager, Technical Policy, Institute of Public Accountants, Committee Hansard, 13 November 2023, p. 13.