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Indirect Tax Legislation Amendment (Small Business Measures) Bill 2004

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2002-2003-2004

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Indirect Tax Legislation Amendment (Small Business measures) bill 2004

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the

Treasurer, the Hon Peter Costello, MP)

 



T able of contents

Glossary                                                                                                               1

General outline and financial impact............................................................ 3

Chapter 1            Annual lodgement and payment....................................... 7

Chapter 2            Annual apportionment of creditable purpose............... 17

Chapter 3            Payment of goods and services tax by instalments..... 27

Index                                                                                                                  31



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

Commissioner

Commissioner of Taxation

GST

goods and services tax

GST Act

A New Tax System (Goods and Services Tax) Act 1999

 



Annual lodgement and payment

Schedule 1 to this bill amends the A New Tax System (Goods and Services Tax) Act 1999 to provide small businesses and non-profit bodies that are voluntarily registered for the goods and services tax (GST) the option to report and pay their GST on an annual basis.

Date of effect :  This amendment will apply from 1 July 2004.

Proposal announced :  This measure was announced in the Treasurer’s Press Release No. 036 of 11 May 2004.

Financial impact :  This measure is expected to result in a cost to revenue of $330 million in 2004-2005, $16.4 million in 2005-2006, $17.2 million in 2006-2007 and $18.2 million in 2007-2008.

Compliance cost impact :  This measure is expected to reduce compliance costs.

Summary of regulation impact statement

Regulation impact on business

Impact :  Currently, small businesses and non-profit bodies that are voluntarily registered for GST must generally pay and report GST on a quarterly or monthly basis. Under the new law, these entities will be able to elect to lodge their GST returns and pay any GST liability on an annual basis. The reduction in the frequency of reporting and payments will reduce their compliance costs.

Main points :

·          Entities are not required to register for the GST unless they have an annual turnover which meets the GST registration threshold ($50,000 for businesses and $100,000 for non-profit bodies). For various reasons, some entities voluntarily register for the GST, and as a result are subject to GST reporting and payment obligations.

·          Currently, these entities must generally report and pay their GST on either a monthly or quarterly basis. The annual GST reporting and payment option will simplify the reporting and payment obligations for these entities by allowing the GST to be reported and paid annually.

·          Entities that elect to apply the annual GST lodgement and payment option will be required to determine annually their eligibility to continue to apply the election.

Annual apportionment of creditable purpose

Schedule 2 to this bill amends the A New Tax System (Goods and Services Tax) Act 1999 to allow small businesses to elect to undertake annual apportionment of input tax credits for certain acquisitions and importations used for a partly creditable purpose.

Date of effect :  This amendment will apply from 1 July 2004.

Proposal announced :  This measure was announced in the Treasurer’s Press Release No. 036 of 11 May 2004.

Financial impact :  This measure is expected to result in a small but unquantifiable cost to revenue.

Compliance cost impact :  This measure is expected to reduce compliance costs.

Summary of regulation impact statement

Regulation impact on business

Impact :  Currently, small businesses that acquire goods and services that are used partly for non-business purposes are required to calculate the extent of non-business use for completion of the goods and services tax (GST) return in which they claim the relevant input tax credit. Under the new law, small businesses with an annual turnover that does not exceed $2 million will be able to undertake apportionment of input tax credits for acquisitions and importations that are partly creditable on an annual basis.

Main points :

·          This measure is expected to reduce compliance costs for small businesses as they will only need to apportion their input tax credits for partly creditable acquisitions and importations on an annual, rather than on a monthly or quarterly basis.

·          Businesses will make a single end of year adjustment to take account of the non-business use of the acquisition or importation at the time of completing their income tax returns. This will allow further cost savings by allowing the GST and income tax information to be determined simultaneously.

Payment of goods and services tax by instalments

Schedule 3 to this bill amends the A New Tax System (Goods and Services Tax) Act 1999 to remove the requirement for an entity to make an annual election to continue with the option to pay goods and services tax by instalments.

Date of effect :  This amendment will apply from 1 July 2004.

Proposal announced :  This measure was announced in the Treasurer’s Press Release No. 036 of 11 May 2004.

Financial impact :  Nil.

Compliance cost impact :  This measure is expected to reduce compliance costs.



C hapter 1  

Annual lodgement and payment

Outline of chapter

1.1         Schedule 1 to this bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to provide small businesses and non-profit bodies that are voluntarily registered for the goods and services tax (GST) the option to report and pay their GST on an annual basis.

Context of amendments

1.2         The Government announced in the 2004-2005 Budget its intention to introduce GST measures aimed at reducing compliance costs for small businesses and non-profit bodies.

1.3         Registration for GST purposes is voluntary for entities that have an annual turnover which does not meet the GST registration turnover threshold. The registration threshold is $50,000 for businesses and $100,000 for non-profit bodies. Under the current GST reporting and payment arrangements, GST registered entities must generally report and pay their GST on either a monthly or quarterly basis.

1.4         There are various reasons to explain why entities register for GST purposes even if they do not meet the GST registration turnover threshold. For instance, some entities may register in order to assist their business customer’s accounting processes by eliminating the customer’s need to distinguish between invoices and tax invoices.

1.5         Compliance costs for small businesses and non-profit bodies that voluntary register for GST purposes can be lowered by reducing the number of times that they are required to report and pay their GST. These types of small businesses and non-profit bodies may undertake a full analysis of their transactions at the time of completing their annual income tax return. Significant costs savings can be achieved for these entities by allowing them to lodge their GST return and pay any GST liability at the same time they complete their annual income tax return.

Summary of new law

1.6         This bill will amend the GST Act to allow an entity that is voluntarily registered for GST purposes the option to report and pay GST on an annual basis.

Comparison of key features of new law and current law

New law

Current law

An entity that is voluntarily registered for GST that has an annual turnover which does not meet the GST registration turnover threshold will be able to elect to report and pay GST on an annual basis.

An entity registered for GST must generally report and pay GST on a monthly or quarterly basis.

Detailed explanation of new law

1.7         Division 151 is inserted into the GST Act. This Division enables certain entities to have annual tax periods. Entities that elect to have annual tax periods will lodge their GST returns and pay their GST or receive refunds of GST on an annual basis. [Schedule 1, item 6, section 151-1]

Subdivision 151-A

1.8         Subdivision 151-A sets out the rules and procedures to enable an entity to make an annual tax period election . An entity will be eligible to make an annual tax period election if its annual turnover does not meet the registration turnover threshold at the time of its election. The registration threshold is $50,000 for businesses and $100,000 for non-profit bodies. Only an entity that does not meet the registration threshold can voluntarily register for GST. In addition, the entity must not have made an election to use the GST instalment option. [Schedule 1, item 6, subsection 151-5(1)]

1.9         An entity will not be eligible to make an annual tax period election if it is required to be registered for GST purposes. For example, a taxi operator will not be eligible to have an annual tax period as it is required to be registered for GST purposes regardless of its annual turnover. [Schedule 1, item 6, subsection 151-5(2)]

1.10       An entity that is eligible to make an annual tax period election must notify the Commissioner of Taxation (Commissioner) of its election. Generally, an election must be made on or before 21 August for entities with monthly tax periods, and on or before 28 October for those with quarterly tax periods. These dates are the last dates for which the entity would normally be required to lodge a first GST return for the financial year. If an entity does not make its election within those dates it cannot make a valid annual tax period election until the next financial year. A valid election will generally take effect from the start of a financial year. [Schedule 1, item 6, section 151-10 and subsection 151-20(1)]

Example 1.1

Ivan has been registered for GST for two years. He reports and pays GST on a monthly basis. Ivan notifies the Commissioner on 12 August that he has made an initial annual tax period election. Ivan’s GST return for the month of July is not due to be lodged with the Commissioner until 21 August. This is the last date for which Ivan could make an annual tax period election. His election takes effect from 1 July.

1.11       However, the Commissioner may allow an election to take effect from the commencement of some other tax period if appropriate. In the financial year commencing 1 July 2004, the Commissioner has a discretion to treat elections made in that financial year, but after the specified dates, as having effect for tax periods commencing 1 July 2004 or some other appropriate date. This will facilitate a smooth transition for the annual tax period option. [Schedule 1, item 6, section 151-10 and paragraph 151-20(2)(b)]

1.12       Another exception to the general election rules will apply to an entity that has a GST lodgement record of six months or less that makes an annual tax period election after 21 August or 28 October as applicable. The election will take effect from the start of the earliest tax period for which the entity’s GST is not yet due. [Schedule 1, item 6, section 151-10 and paragraph 151-20(2)(a)]

Example 1.2

Mary registered for GST on 15 July and lodged her first GST return on 28 October for the September quarter. On 20 November she then makes an annual tax period election. Mary’s election takes effect from 1 October.

1.13       Special rules apply to elections made by representative members of GST groups. These rules ensure that an election can only be made if each member of the group satisfies the eligibility criteria and the annual tax period will apply to each member of the group. [Schedule 1, item 6, section 151-15]

1.14       Once a valid annual tax period election has been made, it will continue to apply unless the entity revokes the election, the Commissioner disallows the election or the entity’s annual turnover meets the registration turnover threshold on 31 July in a financial year. [Schedule 1, item 6, subsection 151-25(1)]

1.15       An entity revokes its annual tax period election by notifying the Commissioner of its revocation. If an entity notifies the Commissioner of its revocation on or before 28 October in a financial year, the annual tax period election will cease to have effect from the start of the financial year in which the revocation is made. This means that the entity will be required to lodge GST returns for the tax periods that started at the beginning of the financial year. If the entity notifies of the revocation after 28 October in a financial year, the annual tax period election will cease to have effect from the start of the following financial year. The entity will remain in the annual reporting and payment option for the full financial year. [Schedule 1, item 6, subsection 151-25(2)]

1.16       The Commissioner can disallow an entity’s annual tax period election if the Commissioner is satisfied that the entity has a history of failing to comply with their tax obligations. This ensures that non-compliant entities are not able to take advantage of the longer reporting period. [Schedule 1, item 6, subsection 151-25(3)]

1.17       Where the Commissioner disallows an entity’s election during the financial year in which the election first took effect, the election will cease to have effect from the start of the tax period in which the election first took effect. For later financial years, if the Commissioner disallows an entity’s election on or before 28 October, the election will cease to have effect from the start of the financial year in which the disallowance is notified. However, if in a later financial year the Commissioner disallows an entity’s election after 28 October, the election will cease to have effect from the start of the financial year following the year of notification. This means that the entity remains in the annual GST reporting and payment system for the full financial year in which the Commissioner notified it of the disallowance. [Schedule 1, item 6, subsection 151-25(4)]

Example 1.3

Jim has been in the annual reporting and payment system for a number of financial years. On 15 November the Commissioner has reason to notify Jim that his election has been disallowed. Jim’s election will cease to have application from 1 July in the financial year immediately following the year in which the Commissioner notified him of the disallowance.

If the Commissioner had notified Jim of the disallowance on 15 September, his election would have ceased to have effect from 1 July in the financial year of the notification.

1.18       Once an entity has made a valid annual tax period election, the entity is required to determine on 31 July of each financial year whether its annual turnover meets the registration turnover threshold. If an entity determines that its annual turnover meets the registration turnover threshold on this date, the entity will be ineligible to continue with the annual GST lodgement and payment option. The annual tax period election will cease to have effect from the start of the financial year in which 31 July falls. This means that the entity will be required to lodge a monthly or quarterly GST return for the tax period commencing at the start of that financial year. [Schedule 1, item 6, subsection 151-25(5)]

Subdivision 151-B

1.19       Subdivision 151-B sets out the consequences that apply to an entity that makes an annual tax period election. An entity that makes a valid election will have a tax period that is a financial year. The tax period is referred to as the entity’s annual tax period . Where an election takes effect during a financial year the entity will have an annual tax period that consists of the remainder of the financial year. The date the annual tax period commences will depend on the date the election takes effect under section 151-10. [Schedule 1, item 6, section 151-40]

1.20       An entity that has made an annual tax period election must lodge its GST return for the annual tax period no later than the date required to lodge its annual income tax return with the Commissioner. Entities that are not required to lodge income tax returns must lodge their GST return on or before 28 February in the financial year following the end of the relevant annual tax period. [Schedule 1, item 6, section 151-45]

Example 1.4

Kerry satisfies the Commissioner’s criteria to be exempt from lodging an annual income tax return. Therefore, Kerry must lodge her annual GST return no later than 28 February in the financial year immediately following the end of the financial year to which the GST return relates.

1.21       If an entity’s net amount for the annual tax period is greater than zero, the entity must pay that net amount on or before the time that the entity is required to give the Commissioner its GST return. [Schedule 1, item 6, section 151-50]

1.22       Where an individual who has made an annual tax period election dies, or where an entity ceases to carry on an enterprise, or has its registration cancelled, the annual tax period is not affected by the death, cessation or cancellation, but will instead apply until the end of the financial year in which the event took place. [Schedule 1, item 6, section 151-55]

1.23       If an individual becomes bankrupt, or is an entity that goes into liquidation or receivership, or for some other reason ceases to exist, the entity’s annual tax period will end on the day before the bankruptcy, liquidation or receivership. The GST return will be due and any GST payable for the annual tax period on or before the 21st day of the month following the end of the annual tax period (i.e. the date the entity went into bankruptcy, liquidation, receivership or cessation). Similar rules apply when a change is made to the membership of a GST group. [Schedule 1, item 6, sections 151-60 and 151-65]

1.24       Where the membership of a GST group changes on a date that is not the end of the financial year, the remainder of the financial year will consist of one or more tax periods that apply to the members as if the annual tax period election had never taken effect. The remaining tax periods will commence on the day following the end of the annual tax period. The tax periods will be the normal GST monthly or quarterly tax periods. [Schedule 1, item 6, section 151-70]

Example 1.5

ABC and XYZ are members of a GST group with a valid annual tax period election. ABC leaves the group on 15 January. The annual tax period ends on 15 January. The new quarterly tax period for each entity will commence on 16 January.

Consequential amendments

1.25       Subsection 62(2) of the Taxation Administration Act 1953 has been amended to include items 37AD, 37AE and 37AF to ensure that the Commissioner’s refusal to allow an annual tax period election to take effect from the start of another tax period or refusing a request to make an annual tax period election on a specified day, and the Commissioner’s disallowance of an entity’s annual tax period election are reviewable GST decisions. [Schedule 1, item 10, subsection 62(2)]

Application and transitional provisions

1.26       The amendments apply, and are taken to have applied, in relation to net amounts for tax periods starting on or after 1 July 2004. [Schedule 1, item 11]

REGULATION IMPACT STATEMENT

Policy objective

1.27       The objective of enabling eligible entities to lodge their GST return on an annual basis is to achieve a significant and ongoing reduction in reporting costs and their compliance burden. This will be achieved by providing entities that are not required to be registered for GST, but who voluntarily register, an alternative reporting and payment method in addition to those that are currently available under the new tax system.

1.28       As the information collected on the GST return is essential to the integrity of the new tax system, the measure is also intended to avoid unduly risking the integrity of the system. Entities will continue to provide sufficient information, in a suitable timeframe, to ensure that necessary appropriate compliance verification can continue.

Implementation options

1.29       The recommended option is to allow GST registered entities with an annual turnover that does not meet the registration turnover threshold ($50,000 for businesses and $100,000 for non-profit bodies) to pay GST or claim refunds annually via the lodgement of an annual GST return.

1.30       This was the only option considered because it meets the aim of reducing compliance costs for those entities that are voluntarily registered for GST purposes, while preserving the integrity of the GST system.

1.31       It is intended that entities would be able to take advantage of this concession from the commencement of the 2004-2005 income year.

Assessment of impacts

Impact group identification

1.32       The measure is intended to particularly benefit small businesses and non-profit bodies that currently lodge their GST returns on a quarterly basis. The impact of this measure would be broadly similar for each of these taxpayer groups.

1.33       There are approximately 740,000 businesses and 30,000 non-profit bodies that have annual turnovers which do not meet the registration turnover threshold and which are registered for GST purposes. Some of these entities lodge monthly returns despite not meeting the threshold for compulsory monthly lodgement. These entities are predominantly in a net refund position and choose to lodge monthly to improve their cash flow position. However, entities that are in a net refund position may still choose to report and pay their GST on an annual basis if they assess that the compliance cost saving from reporting annually is outweighed by the cash flow impact from reporting monthly.

Analysis of costs / benefits

1.34       This measure is expected to reduce compliance costs for small business and non-profit bodies, who currently lodge GST returns quarterly or monthly, by providing an additional option to ease their reporting burden. There is expected to be a significant but unquantifiable reduction in compliance costs as these entities will only need to report and pay their GST at the same time they lodge their income tax return.

1.35       There will be minor costs to businesses and charities in implementing the recommendations but these are likely to be negligible when compared with the overall reduction in compliance costs from the new measure. Affected taxpayers may incur upfront costs in familiarising themselves with and evaluating the additional reporting and payment option. This upfront compliance cost is expected to be small. Adoption of the new arrangements is also optional and entities that are satisfied with the existing system may continue to utilise their existing arrangements.

1.36       In some cases, businesses will seek professional advice. This decision is a matter for the individual business to take, having regard to the upfront cost of such advice, which may be outweighed by the benefits, such as improved cash flow and better business management which may result from professional advice.

1.37       There will be an upfront cost to the Australian Taxation Office in making appropriate changes to its systems and processes, together with other administrative costs and corporate flow-ons. The administrative costs of implementation cannot be quantified at this stage.

1.38       The introduction of this measure is expected to result in a deferral of GST revenue from one year to the next. In 2004-2005, this measure is expected to result in a deferral in GST revenue of $330 million. The deferral in GST revenue in later financial years is expected to be between $16 million and $19 million.

Consultation

1.39       Whilst there has been no consultation on this specific proposal, the measure is a variant on proposals that have been made by various tax professional bodies in respect of introducing annual reporting cycles for small business.

Conclusion and recommended option

1.40       The intention of this measure is to lessen the compliance costs on small business and non-profit bodies while still collecting information that is sufficient to maintain the integrity of the new tax system. In broad terms, while this measure may require some short-term adjustment by business and non-profit bodies to the changed reporting arrangements, it would provide immediate reductions in the costs of remitting and reporting GST for small businesses and non-profit bodies.

1.41       This option would address the concerns raised by small businesses and tax practitioners regarding the compliance costs for those who are not a significant risk to the system or who do not gain significant cash flow advantages from being required to report more frequently.



C hapter 2  

Annual apportionment of creditable purpose

Outline of chapter

2.1         Schedule 2 to this bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to allow small businesses to elect to undertake annual apportionment of input tax credits for certain acquisitions used for a partly creditable purpose.

Context of amendments

2.2         The Government announced in the 2004-2005 Budget its intention to introduce goods and services tax (GST) measures aimed at reducing the costs of compliance for small businesses and non-profit bodies.

2.3         Small business operators are more likely than larger businesses to acquire goods and services that are used for a partly creditable purpose. This means that the business applies the acquisition only partly for the purpose of their enterprise. In particular, small business may have private usage for electricity, telephone, lease payments, rent and other regular ongoing expenses.

2.4         Under the current lodgement and payment rules, these businesses are required to determine the amount of input tax credits they will claim for goods and services acquired in each quarterly or monthly tax period. This requires the business to calculate its potential non-enterprise or private use of the acquisition so that it does not incorrectly claim input tax credits.

2.5         In practice, the actual use of the acquisition may not be accurately determined until the business is required to complete and lodge its annual income tax return. It is at this time that the business will undertake the analysis, or seek the services of a tax professional to undertake the analysis, needed to more accurately establish its use of the acquisition. If the actual use is established to be different to the assumed use, the business must undertake to correct its earlier input tax credit claim.

2.6         In recognition of this problem, the Government has decided to allow small businesses that meet certain eligibility criteria to be able to elect to determine their non-enterprise or private use of acquisitions on an annual basis. The business would initially make a claim for the full input tax credit applicable to the acquisition in the relevant quarterly or monthly GST return. The business will then be required to make a later single adjustment of its input tax credits to take account of the actual use. Businesses will be able to make the relevant increasing adjustment at any time up to the end of the tax period in which it is required to lodge its income tax return. This will allow those businesses that are required to lodge an income tax return to simultaneously establish the extent of business use for both income tax and GST purposes and thereby assist businesses to lower their compliance costs.

Summary of new law

2.7         This bill will amend the GST Act to allow an entity that satisfies certain eligibility criteria to elect to undertake annual apportionment of input tax credits for acquisitions or importations that are partly creditable.

Comparison of key features of new law and current law

New law

Current law

An entity that satisfies the eligibility criteria can elect to claim full input tax credits at the time of attribution for certain acquisitions and importations that are partly creditable. The entity will make a later single adjustment to the input tax credits it has claimed during the financial year to account for the application of the acquisitions or importations for an other than creditable purpose.

At the time of making a claim, an entity may claim an input tax credit to the extent that the acquisition or importation is for a creditable purpose.

Detailed explanation of new law

2.8         Division 131 is inserted into the GST Act. This Division sets out the rules that will enable an entity that satisfies specified eligibility criteria to elect to undertake an annual apportionment for input tax credits relating to acquisitions that are partly creditable. [Schedule 2, item 11, section 131-1]

Subdivision 131-A

2.9         Subdivision 131-A sets out the rules and procedures to enable an entity to make an annual apportionment election .An annual apportionment election is one that satisfies new section 131-10. An entity that makes an annual apportionment election must keep a record of that election and any later revocation of the election. The election takes effect from the commencement of the earliest tax period for which a GST return is not yet due. This means that if the election is made before the date the GST return for a particular tax period is to be lodged with the Commissioner of Taxation (Commissioner), the election will take effect from the start of the tax period to which the return relates. [Schedule 2, item 11, section 131-10]

Example 2.1

Harry lodges GST returns on a quarterly basis. His GST return for the quarter ended 31 March is due on or before 28 April. Harry elects to apply the annual apportionment option on 25 April. As Harry made his election before the due date of his GST return for the quarter ended 31 March, the election is taken to have commenced at the beginning of the tax period that ended on 31 March.

2.10       An entity will be eligible to make an election if its annual turnover does not exceed the annual apportionment turnover threshold at the time of the election. This means that an entity must have an annual turnover that does not exceed $2 million or such higher amount as specified in regulations. The entity must not be subject to either the GST instalment or annual tax period options at the time of the election, as these options do not involve the lodgement of GST returns on a quarterly or monthly basis. [Schedule 2, item 11, section 131-5]

2.11       Special rules apply to elections made by representatives of GST groups. These rules ensure that an election can only be made if each member of the group satisfies the eligibility criteria. If the representative member makes or revokes an election, each member is taken to have made or revoked the election. [Schedule 2, item 11, section 131-15]

2.12       Once a valid annual apportionment election has been made, it will continue to apply unless the entity revokes the election, the Commissioner disallows the election, or the entity’s annual turnover exceeds the annual apportionment turnover threshold on 31 July in a financial year. [Schedule 2, item 11, subsection 131-20(1)]

2.13       An entity may revoke its election at any time. The revocation takes affect at the start of the earliest tax period for which a GST return is not yet due. This means that if an entity revokes its election before the GST return for a tax period is due to be lodged with the Commissioner, the revocation will have effect from the start of the tax period to which the GST return relates. [Schedule 2, item 11, subsection 131-20(2)]

Example 2.2

Harry revokes his election on 25 April. His quarterly GST return for the quarter ended 31 March is due for lodgement with the Commissioner on 28 April. Harry will complete his GST return for the quarter ending 31 March as if the election has been revoked from the start of that quarter on 1 January.

2.14       The Commissioner can disallow an entity’s annual apportionment election if the Commissioner is satisfied that the entity has a history of failing to comply with its tax obligations. The disallowance will take effect from the start of the tax period in which the Commissioner notifies the entity of the disallowance. Therefore, the entity will not be required to amend GST returns already lodged with the Commissioner where the Commissioner disallows an election. [Schedule 2, item 11, subsections 131-20(3) and (4)]

2.15       Where an entity exceeds the annual apportionment turnover threshold of $2 million on 31 July in a financial year, the entity’s election ceases to have effect from the start of the entity’s tax period in which 31 July falls. This date has been selected to allow those entities that are subject to monthly tax periods sufficient time to correctly complete their GST return for July, and those subject to quarterly tax periods sufficient time to correctly complete their GST return for the quarter ended 30 September. [Schedule 2, item 11, subsection 131-20(5)]

Subdivision 131-B

2.16       Subdivision 131-B sets out the consequences that apply to an entity that makes an annual apportionment election. An entity that has made a valid election will be entitled to claim an input tax credit equal to the GST payable on acquisitions or importations that are partly creditable. This means that the acquisition or importation does not have to be applied solely for the enterprise or business in order for the entity to claim a full input tax credit. An acquisition or importation is not partly creditable where it is applied or intended to be applied solely for a private, or non-enterprise purpose, or solely for the purpose of making input taxed supplies. [Schedule 2, item 11, sections 131-40 and 131-45]

Example 2.3

Harry acquires telephone services from a local provider. He paid $20 GST on the supply of those services. He uses these services to make a combination of business and private calls. Harry has made a valid election to apply annual apportionment to his acquisitions. He claims the full $20 as an input tax credit in his GST return for the tax period in which the services were acquired.

2.17       The annual apportionment option will not apply to acquisitions or importations that are of a kind specified in regulations. While it is not possible to definitively specify the acquisitions and importations to which the apportionment measure is intended to apply, the policy intent is that the measure would relate only to acquisitions and importations relating to the normal operation of a business that are used partly for business purposes. The operation of the annual apportionment method may give rise to unforeseen practices that are clearly not consistent with the policy intent. A regulation-making provision has therefore been inserted to allow regulations to prescribe kinds of acquisitions or importations to which the annual apportionment option will not apply. The regulation-making provision is intended to provide flexibility to ensure the ongoing integrity of the measure. It is not intended that regulations be made at this stage to specify any kinds of acquisitions or importations. [Schedule 2, item 11, sections 131-40 and 131-45]

2.18       An entity cannot claim an input tax credit under the annual apportionment option to the extent the acquisition or importation relates to the making of input taxed supplies - consistent with the more general policy regarding input taxed supplies. Therefore annual apportionment does not apply to acquisitions to the extent they relate to the supply of residential rent or premises or to making financial supplies. Also, annual apportionment will not apply to acquisitions that are, to any extent, reduced credit acquisitions used to make financial supplies. In order to ensure the appropriate reduced credit entitlement is calculated, and to avoid complexity, reduced credit acquisitions will continue to be subject to the existing special rule for such acquisitions in Division 70 of the GST Act. In addition, an entity cannot claim an input tax credit under the annual apportionment option to the extent the entity is not required to provide, or liable to provide, consideration for it. [Schedule 2, item 11, sections 131-40 and 131-45]

2.19       A special rule applies to the acquisition or importation of a car. The amount of input tax credit to which the annual apportionment election applies must be worked out under section 69-10 of the GST Act. In general, this means the amount of input tax credit that an entity can claim in relation to the acquisition or importation of a car cannot exceed the input tax credit that would apply to a car acquired or imported for the amount of the car limit. The GST dictionary already contains a definition of ‘car’ and ‘car limit’ for GST purposes. [Schedule 2, item 11, section 131-50]

2.20       After the end of the financial year in which the input tax credit for an acquisition or importation was attributed, an entity may have an increasing adjustment. The amount of the increasing adjustment is calculated by comparing the input tax credit already claimed during the financial year with the amount of the input tax credit that should have been claimed taking into account the application for a creditable purpose. There are similar rules that provide for the calculation of an increasing adjustment where an entity revokes its election or has its election disallowed by the Commissioner before the end of a financial year. [Schedule 2, item 11, section 131-55]

Example 2.4

Harry has applied the telephone services 80% of the time for business purposes during the relevant financial year. Harry determines the amount of the increasing adjustment at the end of the financial year as follows:

input tax credit claimed in quarterly GST return                           $20

input tax credit on basis of actual business use at 80%                               $16

amount of increasing adjustment                                                    $4

2.21       Any increasing adjustment is attributed to the latest tax period in which the entity’s annual income tax return is due to be lodged with the Commissioner. This means that the entity will make the adjustment in the GST return that covers the quarterly or monthly tax period in which the date for lodgement of its income tax return occurs. If an entity is not required to lodge an income tax return, the entity must attribute the increasing adjustment to the tax period that ends on 31 December. If an entity revokes or the Commissioner disallows an election during a financial year, the entity will attribute the increasing adjustment for the tax period in which the revocation or disallowance takes effect. [Schedule 2, item 11, section 131-60]

Example 2.5

Harry has an increasing adjustment of $4 in relation to input tax credits he has claimed in a particular financial year. He is required to lodge his income tax return for that financial year by 30 November. Harry will attribute the $4 increasing adjustment to the quarterly tax period ended 31 December. This is the tax period in which the due date of his tax return fell. Harry’s GST return for the tax period ended 31 December is required to be lodged by 28 February.

2.22       Division 78 of the GST Act has been amended to take account of the introduction of new Division 131. An entity that makes a claim under an insurance policy will continue to advise its insurer of its actual input tax credit entitlement for the insurance premium as if the annual apportionment election did not apply. This will allow the insurer to determine its own entitlement to claim a decreasing adjustment arising on any settlement of a claim under the entity’s insurance policy. [Schedule 2, item 7, subsection 78-10(2); item 8, subsection 78-50(2)]

2.23       Other sections of the GST Act that determine an amount of input tax credit that an entity may claim for an acquisition or importation that is partly creditable have been amended to take account of the operation of Division 131. [Schedule 2, item 6, subsection 72-45(1A); item 9, subsection 84-13(1); item 10, subsection 111-5(3); item 12, subsection 132-5(2)]

Consequential amendments

2.24       Subsection 62(2) of the Taxation Administration Act 1953 is amended to include items 37AB and 37AC to ensure that the Commissioner’s refusal for an annual apportionment election to take effect from the start of another tax period and the Commissioner disallowing an annual apportionment election are reviewable GST decisions. [Schedule 2, item 18, subsection 62(2)]

Application and transitional provisions

2.25       The amendments apply, and are taken to have applied, in relation to net amounts for tax periods starting on or after 1 July 2004. [Schedule 2, item 19]

REGULATION IMPACT STATEMENT

Policy objective

2.26       The objective of allowing small businesses to undertake annual apportionment of input tax credits for certain acquisitions and importations used partly for non-business purposes is to achieve a significant and ongoing reduction in compliance costs.

2.27       As the information collected on the GST return is essential to the integrity of the new tax system, the measure is also intended to avoid unduly risking the integrity of the system. Entities will continue to provide sufficient information, in a suitable timeframe, to ensure that necessary appropriate compliance verification can continue.

Implementation options

Two options were considered

Option 1

2.28       Allow GST registered entities with an annual turnover of $2 million or less the option to undertake annual apportionment of input tax credits for acquisitions and importations that are partly creditable except large value acquisitions or importations.

Option 2

2.29       Allow GST registered entities with an annual turnover of $2 million or less the option to undertake annual apportionment of input tax credits for acquisitions and importations that are partly creditable except acquisitions or importations that may be specified in the regulations.

Assessment of impacts

Impact group identification

2.30       Both options are intended to benefit small businesses and non-profit organisations with annual turnovers of $2 million or less which acquire goods and services that are used only partly in the course of carrying on their enterprise. The entities most affected by this measure would be individuals registered for GST that use acquisitions partly for private or non-business purposes. The change will particularly benefit businesses that rely on their tax agent to calculate apportionment for income tax purposes and then use it for GST purposes. Data on the potential number of entities affected by this measure is not available as data on apportionment is not separately captured in GST returns.

Analysis of costs / benefits

2.31       The two options have similar costs and benefits. The main point of differentiation between them is the scope of acquisitions and importations to which the annual apportionment measure will apply.

2.32       Each option is expected to reduce compliance costs for small businesses by providing them with an option to apportion their input tax credits for partly creditable acquisitions and importations on an annual, rather than on a monthly or quarterly basis. Small businesses are currently required to calculate their input tax credit entitlement, to reflect the projected use of the acquisition or importation in their enterprise, in each GST return they lodge with the Commissioner.

2.33       In practice, the actual use of an acquisition or importation used partly in the course of an enterprise may not be accurately determined until the time a business completes and lodges its annual income tax return. Enabling businesses to undertake annual apportionment on acquisitions and importations used for a partly creditable purpose will particularly benefit those businesses that rely on their tax agent to calculate apportionment for income tax purposes, as this analysis can also be used for GST purposes.

2.34       Allowing small businesses to undertake annual apportionment without limiting the scope of acquisitions and importations to exclude large value acquisitions and importations would avoid complexity. However, it could result in some businesses accumulating relatively large end of year tax liabilities. This would be exacerbated in the situation where a full input tax credit has been claimed but the extent of the creditable purpose for the acquisition or importation is only a small percentage of the total usage, resulting in a large increasing adjustment.

2.35       Excluding large value acquisitions and importations from the measure would not have a significant impact on compliance costs. Given that large value acquisitions tend to be infrequent, they would be easy to identify and the extra compliance involved in allowing for them would only be small.

2.36       Limiting the types of acquisitions to which the option applies would minimise the risk of an entity accumulating large tax liabilities. Nevertheless, it is expected that before electing this option entities would carefully weigh up the advantages of lower quarterly compliance and tax liabilities with the prospect of a deferred end-of-year tax liability.

2.37       The option of having a provision to exclude from the measure acquisitions or importations that may be specified in the regulations would provide no immediate limit to the measure. However, it would provide flexibility for the scope of the measure to be adjusted in the light of experience and unforeseen issues.

2.38       The Australian Taxation Office will need to communicate the annual apportionment option to eligible entities. However, administration costs are expected to be lower to the extent that there will be less revisions to GST returns due to apportionment only having to be calculated once per year.

2.39       The introduction of this measure is expected to result in a small but unquantifiable deferral of GST revenue from one year to the next.

Consultation

2.40       Consultation on the need to have limits on the measure has been undertaken with small business representatives and tax practitioners. Most participants preferred that there should be no restriction on the acquisitions or importations to which the annual apportionment measure applies.

Conclusion and recommended option

2.41       Option 2 is the recommended option. This option provides flexibility to specify acquisitions or importations that should be excluded from annual apportionment if appropriate, and represents the appropriate balance between reducing compliance costs for small businesses and ensuring the ongoing integrity of the measure.



Outline of chapter

3.1         Schedule 3 to this bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to remove the requirement for an eligible entity to make an annual election in order to continue to pay goods and services tax (GST) by instalments.

Context of amendments

3.2         The Government announced in the 2004-2005 Budget its intention to introduce GST measures aimed at reducing compliance costs for small businesses and non-profit bodies.

3.3         Currently, entities with an annual turnover of $2 million or less, that are also in a net GST payable position, can elect to pay their GST through quarterly instalments with an annual reconciliation. However, these entities are also required to make a new election each financial year.

3.4         In order to reduce compliance costs, an entity that wishes to continue to pay GST by instalments will no longer be required to make a new election each year. The entity’s initial election will continue to apply while ever the entity continues to satisfy the eligibility requirements.

Summary of new law

3.5         This bill will amend the GST Act to simplify the annual election rule under the GST instalment option. An entity that continues to be eligible to pay its GST through instalments will remain subject to the instalment system unless the entity becomes ineligible or chooses to exit the instalment system.

Comparison of key features of new law and current law

New law

Current law

An entity that is eligible to elect to apply the GST instalment option is not required to make a new election each financial year. An entity that revokes its election, or is no longer eligible, must notify the Commissioner of Taxation (Commissioner) of the change in their circumstances.

An entity that is eligible to elect to apply the GST instalment option must make a new election each financial year.

Detailed explanation of new law

3.6         An entity that is eligible to make a GST instalment payer election will continue to be required to notify the Commissioner of its election. Currently, an election cannot relate to more than one financial year. An entity wishing to continue with the instalment option is required to make a new election by 28 October each year. This requirement has been removed and the entity’s initial election will be treated as an ongoing election.

3.7         An initial election will take effect from the start of the earliest tax period for which the entity’s GST return is not yet due. That is, the election will apply to a tax period for which the entity has not yet lodged a GST return with the Commissioner. However, the Commissioner may allow the election to take effect from some other tax period. [Schedule 3, item 1, subsection 162-15(2)]

3.8         Once a valid GST instalment payer election has been made, it will continue to apply unless the entity revokes the election, the Commissioner disallows the election, its annual turnover exceeds the instalment turnover threshold or the entity is in a net refund position. [Schedule 3, item 2, subsection 162-30(1)]

3.9         An entity may revoke its election by notifying the Commissioner of its revocation. If an entity notifies the Commissioner of the revocation on or before 28 October in a financial year, its election will cease to have effect from the start of that same financial year. If an entity notifies the Commissioner of its revocation after 28 October in a financial year, the election will cease to have effect from the start of the following financial year. This means the entity is either in or out of the instalment system for a full financial year. [Schedule 3, item 2, subsection 162-30(2)]

3.10       The Commissioner can disallow an entity’s election to pay GST by instalments if the Commissioner is satisfied that the entity has a history of failing to comply with their tax obligations. If the Commissioner disallows an entity’s election during the financial year in which the election first took effect, the election will cease to have effect from the start of the tax period in which the election first took effect. For later financial years, if the Commissioner disallows an entity’s election on or before 28 October, the disallowance will have effect from the start of that financial year. If the Commissioner disallows the election after 28 October the disallowance will take effect from the start of the next financial year. [Schedule 3, item 2, subsections 162-30(3) and (4)]

3.11       Once an entity has made a valid GST instalment payer election, the entity is required to determine on 31 July of each financial year whether its annual turnover exceeds the instalment turnover threshold of $2 million. The entity must also continue to establish if it is in a net refund position as determined under section 162-5 of the GST Act. The entity determines if it is in a net refund position in the first tax period that applies to the entity after the end of the previous financial year. An entity that does not meet these criteria will be ineligible to continue in the GST instalment system and its election will cease to have effect from the start of the financial year in which it becomes ineligible to continue in the GST instalment system. [Schedule 3, item 2, subsections 162-30(5) and (6)]

Consequential amendments

3.12       Subsection 62(2) of the Taxation Administration Act 1953 is amended to include the reference to the relevant subsections within Division 162 of the GST Act which refer to the Commissioner’s disallowance of an election to pay GST by instalments and the Commissioner’s refusal to allow a GST instalment payer election to take effect from the start of another tax period. [Schedule 3, item 4, subsection 62(2); item 5, subsection 62(2)]

Application and transitional provisions

3.13       The amendments apply, and are taken to have applied, in relation to net amounts for tax periods starting on or after 1 July 2004. [Schedule 3, item 6]



I ndex         

Schedule 1: Annual lodgement and payment

Bill reference

Paragraph number

Item 6, section 151-1

1.7

Item 6, subsection 151-5(1)

1.8

Item 6, subsection 151-5(2)

1.9

Item 6, section 151-10 and subsection 151-20(1)

1.10

Item 6, section 151-10 and paragraph 151-20(2)(a)

1.12

Item 6, section 151-10 and paragraph 151-20(2)(b)

1.11

Item 6, section 151-15

1.13

Item 6, subsection 151-25(1)

1.14

Item 6, subsection 151-25(2)

1.15

Item 6, subsection 151-25(3)

1.16

Item 6, subsection 151-25(4)

1.17

Item 6, subsection 151-25(5)

1.18

Item 6, section 151-40

1.19

Item 6, section 151-45

1.20

Item 6, section 151-50

1.21

Item 6, section 151-55

1.22

Item 6, sections 151-60 and 151-65

1.23

Item 6, section 151-70

1.24

Item 10, subsection 62(2)

1.25

Item 11

1.26

Schedule 2: Annual apportionment of creditable purpose

Bill reference

Paragraph number

Item 6, subsection 72-45(1A)

2.23

Item 7, subsection 78-10(2)

2.22

Item 8, subsection 78-50(2)

2.22

Item 9, subsection 84-13(2A)

2.23

Item 10, subsection 111-5(3)

2.23

Item 11, section 131-1

2.8

Item 11, section 131-5

2.10

Item 11, section 131-10

2.9

Item 11, section 131-15

2.11

Item 11, subsection 131-20(1)

2.12

Item 11, subsection 131-20(2)

2.13

Item 11, subsections 131-20(3) and (4)

2.14

Item 11, subsection 131-20(5)

2.15

Item 11, sections 131-40 and 131-45

2.16, 2.17, 2.18

Item 11, section 131-50

2.19

Item 11, section 131-55

2.20

Item 11, section 131-60

2.21

Item 12, subsection 132-5(2)

2.23

Item 18, subsection 62(2)

2.24

Item 19

2.25

Schedule 3: Payment of goods and services tax by instalments

Bill reference

Paragraph number

Item 1, subsection 162-15(2)

3.7

Item 2, subsection 162-30(1)

3.8

Item 2, subsection 162-30(2)

3.9

Item 2, subsections 162-30(3) and (4)

3.10

Item 2, subsections 162-30(5) and (6)

3.11

Item 4, subsection 62(2)

3.12

Item 5, subsection 62(2)

3.12

Item 6

3.13