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Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018

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2016-2017-2018

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the

Treasurer, the Hon Scott Morrison MP)





Table of contents

Glossary.............................................................................................................. 1

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

Chapter 1               Extending accelerated depreciation for small business entities     5

Chapter 2               Statement of Compatibility with Human Rights............ 13

Chapter 3               Regulation impact statement............................................ 15

 

 



 

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

Abbreviation

Definition

ATO

Australian Taxation Office

ITAA 1997

Income Tax Assessment Act 1997



Extending accelerated depreciation for small business entities

Schedule 1 to this Bill amends the tax law to extend by 12 months to 30 June 2019 the period during which small business entities can access expanded accelerated depreciation rules. This extension provides a boost to small business activity and investment for another year.

Date of effect :  This measure applies on and from 1 July 2018.

Proposal announced This measure was announced by the Treasurer on 8 May 2018 as part of the 2018-19 Budget as ‘Backing Small Business Investment — further extending the immediate deductibility threshold’.

Financial impact This measure is estimated to have the following revenue impact over the forward estimates period:

2017-18

2018-19

2019-20

2020-21

2021-22

-

..

-$550m

$50m

$150m

- nil

.. not zero, but rounded to zero

Human rights implications :  This Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights , paragraphs 2.1 to 2.5.

Compliance cost impact :  There is an estimated total average annual regulatory saving for businesses associated with this measure of $2.2 million.

Summary of regulation impact statement

Regulation impact on business

Main points :

•        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.

•        This measure is expected to result in a small overall compliance saving.

 



Outline of chapter

1.1                   Schedule 1 to this Bill amends the tax law to extend by 12 months to 30 June 2019 the period during which small business entities can access expanded accelerated depreciation rules. This extension provides a boost to small business activity and investment for another year.

1.2                   The amendments extend the availability of an immediate deduction for depreciating assets, amounts included in the second element of a depreciating asset’s cost and general small business pools, where the amount is less than $20,000 rather than $1,000. This continues to improve cash flow for small businesses for another year.

1.3                   During this period, the increased threshold continues to be available to all small business entities (including those that previously opted out of the accelerated depreciation rules).

1.4                   All legislative references are to the ITAA 1997 unless the contrary is indicated.

Context of amendments

Small business entities

1.5                   Division 328 provides a range of income tax concessions for small business entities, including access to simplified depreciation rules (see Subdivision 328-C). Under section 328-110 an entity is a small business entity for an income year if the entity carries on a business in that year and either:

•        the entity carried on a business in the prior income year and its aggregated turnover was less than a threshold amount; or

•        the aggregated turnover of the entity in the current income year is likely to be less than that threshold.

1.6                   In the 2015-16 income year, the threshold was $2 million, while for 2016-17 and later income years it is $10 million.

Accelerated depreciation for small business entities

1.7                   The Tax Laws Amendment (Small Business Measures No. 2) Act 2015 amended the tax law to temporarily increase to $20,000 the threshold below which certain depreciating assets, costs relating to depreciating assets and general small business pools could be immediately deducted by small business entities. The temporary increase applied under that Act from 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015 until 30 June 2017. The threshold was to revert back to $1,000 from 1 July 2017.

1.8                   In the 2017-18 Budget, the Government announced an extension to the application period of the temporarily increased threshold for 12 months until 30 June 2018. This was enacted in the Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Act 2017 . The Government announced a further extension to the application period of the temporarily increased threshold for 12 months, until 30 June 2019 in the 2018-19 Budget.

1.9                   This encourages additional capital investment by small businesses through lowering the pre-tax rate of return required to justify new investments for an additional 12 months. Increasing the immediate deduction for capital expenditure improves small businesses’ cash flow. Small businesses tend to be more vulnerable to cash flow problems than larger businesses because their profitability tends to be more volatile and they have lower levels of retained earnings. The impact is expected to be bigger for new small businesses, as large capital expenditures often occur early in the life of businesses.

Summary of new law

1.10               This Bill amends the accelerated depreciation rules for small businesses to extend by 12 months to 30 June 2019 the availability of an immediate deduction for depreciating assets, amounts included in the second element of a depreciating asset’s cost and general small business pools, where the amount is less than $20,000.

1.11               This Bill ensures that during this period, the $20,000 threshold continues to be available to all small business entities (including those that previously opted out of the accelerated depreciation rules).

Comparison of key features of new law and current law

New law

Current law

Extension of deduction for depreciating assets costing less than $20,000

Small business entities can claim an immediate deduction for depreciating assets that cost less than $20,000, provided the asset is first acquired at or after 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015, and first used or installed ready for use on or before 30 June 2019 . Depreciating assets that do not meet these timing requirements continue to be subject to the $1,000 threshold.

Small business entities can claim an immediate deduction for depreciating assets that cost less than $1,000 if the asset is first used or installed ready for use on or after 1 July 2019 .

Small business entities can claim an immediate deduction for depreciating assets that cost less than $20,000, provided the asset is first acquired at or after 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015, and first used or installed ready for use on or before 30 June 2018. Depreciating assets that do not meet these timing requirements continue to be subject to the $1,000 threshold.

Small business entities can claim an immediate deduction for depreciating assets that cost less than $1,000 if the asset is first used or installed ready for use on or after 1 July 2018.

Extension for deduction for amounts included in the second element of the cost of depreciating assets

Small business entities can claim a deduction for an amount included in the second element of the cost of depreciating assets that are first used or installed ready for use in a previous income year. The total amount of the cost must be less than $20,000 and the cost must be incurred at or after 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015, and on or before 30 June   2019 . Costs that are incurred outside of these times continue to be subject to the $1,000 threshold.

Small business entities can claim a deduction for an amount included in the second element of the cost of depreciating assets that are first used or installed ready for use in a previous income year, where the amount is less than $1,000, and the cost is incurred on or after 1 July 2019 .

Small business entities can claim a deduction for an amount included in the second element of the cost of depreciating assets that are first used or installed ready for use in a previous income year. The total amount of the cost must be less than $20,000 and the cost must be incurred at or after 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015, and on or before 30 June 2018. Costs that are incurred outside of these times continue to be subject to the $1,000 threshold.

Small business entities can claim a deduction for an amount included in the second element of the cost of depreciating assets that are first used or installed ready for use in a previous income year, where the amount is less than $1,000, and the cost is incurred on or after 1 July 2018.

Extension of deduction for low pool values

From 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015, assets that cost $20,000 or more, and costs of $20,000 or more relating to depreciating assets can be allocated to a small business entity’s general small business pool and deducted at a specified rate for the depletion of the pool.

Assets and costs allocated to a general small business pool are deducted at a rate of 15 per cent in the year they are allocated, and a rate of 30 per cent in subsequent income years.

If the balance of a small business entity’s general small business pool is less than $20,000 at the end of an income year, the small business entity can claim a deduction for the entire balance of the pool. The income year must end on or after 12 May 2015, and on or before 30 June 2019 .

If the balance of a small business entity’s general small business pool is less than $1,000 at the end of an income year that ends after 30 June 2019 , the small business entity can claim a deduction for the entire balance of the pool.

From 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015, assets that cost $20,000 or more, and costs of $20,000 or more relating to depreciating assets can be allocated to a small business entity’s general small business pool and deducted at a specified rate for the depletion of the pool.

Assets and costs allocated to a general small business pool are deducted at a rate of 15 per cent in the year they are allocated, and a rate of 30 per cent in subsequent income years.

If the balance of a small business entity’s general small business pool is less than $20,000 at the end of an income year, the small business entity can claim a deduction for the entire balance of the pool. The income year must end on or after 12 May 2015, and on or before 30 June 2018.

If the balance of a small business entity’s general small business pool is less than $1,000 at the end of an income year that ends after 30 June 2018, the small business entity can claim a deduction for the entire balance of the pool.

Deferral of five year ‘lock-out’ rule

The increased threshold that applies between 12 May 2015 and 30 June 2019 applies to all small business entities, including those subject to the five year lock-out rule in that period because the small business previously opted out of the small business entity capital allowance provisions.

For the purposes of applying the lock-out rule to an income year after 30 June 2019 , only the choice made in the last income year ending on or before 30 June 2019 is relevant.

The increased threshold that applies between 12 May 2015 and 30 June 2018 applies to all small business entities, including those subject to the five year lock-out rule in that period because the small business previously opted out of the small business entity capital allowance provisions.

For the purposes of applying the lock-out rule to an income year after 30 June 2018, only the choice made in the last income year ending on or before 30 June 2018 is relevant.

Detailed explanation of new law

1.12               The period is extended for which the temporary $20,000 threshold applies for the cost of depreciating assets, costs incurred in relation to a depreciating asset included in the second element of a depreciating asset’s cost, and the low pool value deduction under the small business entity capital allowance provisions.

1.13               The temporary threshold now ceases to be available after 30 June 2019 rather than 30 June 2018. The threshold returns to $1,000 for income years ending on or after 1 July 2019.

Deductions for depreciating assets

1.14               A small business entity that has elected to use the small business entity capital allowance rules in Subdivision 328-C for an income year may immediately deduct or ‘write off’ the taxable purpose proportion of the cost of an asset acquired for less than a threshold amount.

1.15               The ‘taxable purpose proportion’ of a depreciating asset is defined in subsection 328-205(3) and in general terms represents the proportion of an asset’s use in an income year that is for the purposes of producing assessable income. The deduction for assets that cost less than the threshold is claimed in the income year in which the asset was first used or installed ready for use.

1.16               This threshold is generally $1,000. However, prior to these amendments a higher $20,000 threshold applied for assets that were first acquired at or after 7.30 pm, by legal time in the Australian Capital Territory on 12 May 2015, and first used or installed ready for use on or before 30 June 2018.

1.17               The amendments extend the period to which the increased threshold applies. It now applies to assets that were first acquired at or after 7.30 pm, by legal time in the Australian Capital Territory on 12 May 2015 and first used or installed ready for use on or before 30 June 2019. [Schedule 1, item 10, paragraph 328-180(4)(b) of the Income Tax (Transitional Provisions) Act 1997]

Deductions for amounts included in the second element of the cost of depreciating assets

1.18               A small business entity can also immediately deduct an amount included in the second element of a depreciating asset’s cost (for example, an amount spent on improving or transporting a depreciating asset), provided the amount is:

•        less than the threshold;

•        the first such amount to be deducted in respect of the asset; and

•        the asset was written off (its cost was fully deducted) in a previous income year.

1.19               Consistent with the changes to the threshold for writing off depreciating assets, this threshold is generally $1,000. However, prior to these amendments a higher $20,000 threshold applied for costs included in the second element of the depreciating assets cost during the period commencing at 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015 and ending on 30 June 2018.

1.20               The amendments extend the period in which the increased threshold applies. It now applies to amounts included in the second element of the asset’s cost during the period commencing 7.30 pm, by legal time in the Australian Capital Territory on 12 May 2015 and ending on 30 June 2019. [Schedule 1, item 11, paragraph 328-180(5)(b) of the Income Tax (Transitional Provisions) Act 1997 ]

Deductions for low pool values

1.21               A small business entity can also deduct the balance of its general small business pool at the end of an income year if the balance of the pool at the end of the year is less than a threshold amount. For this purpose, the balance of the pool is determined prior to calculating any deductions in respect of the pool for the income year.

1.22               This threshold is generally $1,000. However, prior to these amendments a higher $20,000 threshold applied to income years that end during the period commencing at 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015 and ending on 30 June 2018.

1.23               The amendments extend the period in which the increased threshold applies. It now applies to income years that end during the period commencing at 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015 and ending on 30 June 2019. [Schedule 1, item 9, the definition of increased access year in subsection 328-180(1) of the Income Tax (Transitional Provisions) Act 1997 ]

Five year ‘lock-out’ rule

1.24               A small business entity that elects to apply the small business capital allowance provisions in an income year, and then does not choose to apply the provisions for a later income year in which the entity satisfies the conditions to make this choice (that is, the entity ‘opted out’), is not able to apply the small business capital allowance provisions for a period of five income years. This restriction commences from the first of the later years for which the entity could have made the choice to apply the provisions. This rule is contained in subsection 328-175(10), and is commonly referred to as the ‘lock-out’ rule.

1.25               Prior to these amendments, the operation of the lock-out rule was modified for income years that ended on or after 12 May 2015 but on or before 30 June 2018 (referred to as ‘increased access years’). Small business entities did not need to apply the lock-out rule to these years. Further, when determining if the lock-out rule applies in years after the increased access years, all income years prior to the last increased access year are disregarded.

1.26               The amendments extend the period for which the operation of the lock-out rule is modified. The modifications now apply for income years that end on or after 12 May 2015 but on or before 30 June 2019. For most small business entities, this results in one further increased access year. [Schedule 1, item 9, the definition of increased access year in subsection 328-180(1) of the Income Tax (Transitional Provisions) Act 1997]

Consequential amendments

1.27               A number of consequential amendments are made to the ITAA 1997 and the Income Tax (Transitional Provisions) Act 1997 to update relevant guidance material to reflect the amendments made by Schedule 1 to this Bill. [Schedule 1, items 1 to 8, the notes to paragraphs 328-180(1)(b), (2)(a) and (3)(a), note 2 to subsection 328-210(1) and the notes to subsections 328-250(1), (4) and 328-253(4) of the ITAA 1997 and the heading to section 328-180 of the Income Tax (Transitional Provisions) Act 1997].



Chapter 2          

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018

2.1                   This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

2.2                   This Bill amends the accelerated depreciation rules for small businesses to extend by 12 months to 30 June 2019 the availability of an immediate deduction for depreciating assets, amounts included in the second element of a depreciating asset’s cost and general small business pools, where the amount is less than a threshold of $20,000. This will continue to improve cash flow for small businesses, providing a boost to small business activity and investment for another year.

2.3                   During this period, the $20,000 threshold continues to be available to all small business entities (including those that previously opted out of the accelerated depreciation rules).

Human rights implications

2.4                   This Bill does not engage any of the applicable rights or freedoms.

Conclusion

2.5                   This Bill is compatible with human rights as it does not raise any human rights issues.





Chapter 3          

Regulation impact statement

Backing small business investment — further extending the immediate deductibility threshold

1. The problem

3.1                   There are over 3 million small businesses in Australia. These small businesses contribute in many ways to the Australian economy, including to national growth and competitiveness. Small businesses are also adaptable and flexible and they can respond quickly to changing circumstances. According to the Australian Bureau of Statistics, small businesses added around $380 billion to the Australian economy in 2015-16.

3.2                   Small businesses currently have access to a range of tax concessions - in particular, they are able to fully and immediately deduct each eligible depreciating business asset they purchase costing less than $20,000 (“the immediate deductibility threshold”).

3.3                   Small businesses face a unique set of operational challenges, and as a consequence typically have higher failure rates than those for larger companies. A key reason for these higher rates of failure is the challenge small businesses face in managing their cash flow. This is exacerbated by the proportionately higher regulatory costs that small businesses bear relative to larger companies, largely due to their inability to take advantage of economies of scale in understanding and complying with regulation.

3.4                   These reasons remain relevant to the operating environment for small businesses today. Small businesses tend to be more vulnerable to cash flow problems than their larger counterparts because their profitability tends to be more volatile and they have lower levels of retained earnings. It is also not unusual for small businesses to have to manage a disproportionately higher compliance burden, per unit of turnover, than larger businesses.

3.5                   The $20,000 threshold has been in place since 12 May 2015 and expires on 30 June 2018. Small businesses with an aggregated annual turnover of less than $10 million ($2 million before 1 July 2016) are able to access the concessional depreciation arrangements for eligible assets.

3.6                   As noted in the 2015 regulation impact statement prepared for that measure, the threshold was increased to assist small businesses during a period of economic transition and to help counter the risk that the period of economic adjustment would be a protracted one and would result in a reluctance for businesses to invest and take on new workers absent stronger, sustainable demand. [1] During 2015, small businesses were responding by scaling back the level of their capital spending, [2] and had revised downwards their longer-term capital expenditure plans in the non-mining sector, notwithstanding solid growth that year.

3.7                   In addition to helping counteract these behaviours during periods of economic downturn or structural adjustment, accelerated depreciation measures such as the immediate deductibility measure provide enhanced cash flow for small businesses. This can help businesses overcome cash flow pressures arising from other parts of their operations (for example, payment times). [3]

3.8                   Immediate deductibility is beneficial irrespective of economic conditions given the associated cash flow benefits to business.

3.9                   The immediate deductibility threshold will revert back to $1,000 on 1 July 2018, unless there is government intervention. Under a $1,000 threshold, while small businesses with annual turnover less than $10 million could still take advantage of simplified depreciation rules, the cash flow benefits would be reduced and the red-tape costs greater. Small businesses that use these rules are required to track assets they depreciate to ensure all relevant adjustments are made to the small business pool and the appropriate tax deductions are claimed in their tax returns. Records are required to be kept to substantiate these claims. Further background on these costs is provided in the cost benefit analysis section below.

3.10               It is the extra cash flow upfront and less red-tape that the $20,000 threshold provides that makes the difference for small businesses, especially new businesses with start-up costs. Small businesses can use this extra cash flow to re-invest in their business, such as buying new assets, paying down existing debt, and it may also give them the flexibility to hire more staff.

2. Case for government action / objective of reform

3.11               There is a clear role for government to create the right policy settings for Australian small businesses. The Government’s objective is to continue to stimulate small business investment and growth, by providing cash flow benefits and reducing red tape for small businesses.

3.12               Australian small businesses contributed around $380 billion in 2015-16 to the economy. A strong small business sector means more jobs for Australians and more opportunities to build vibrant local communities across the country.

3.13               The immediate deductibility threshold is normally $1,000 and since 12 May 2015 has temporarily been lifted to $20,000. The Government has also expanded access to the write-off to small businesses with an aggregated annual turnover of less than $10 million from 1 July 2016 (previously $2 million). While the higher threshold has been welcomed by small business, which are keen to see it continued for at least one more year (or potentially permanently), any extension needs to be considered alongside the Government’s broader strategic and fiscal priorities.

3.14               A temporary, rather than permanent, $20,000 threshold induces a behavioural response, which encourages some small businesses to bring forward capital investment before the threshold reverts to $1,000. If the higher threshold was made permanent, this behavioural response would be lost.

3. Policy options

Option 1: No policy change (revert to $1,000 immediate deductibility threshold from 1 July 2018)

3.15               Under this option, there would be no new action taken by the Government and current rules regarding the immediate deductibility threshold (for assets costing less than $20,000) would cease on 30 June 2018. 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 2018.

Option 2: Extending the immediate deductibility threshold until 30 June 2019 at the current $20,000 threshold (preferred option)

3.16               This option would extend the $20,000 immediate deductibility threshold for small businesses for an extra 12 months until 30 June 2019.

3.17               Small businesses would be able to immediately deduct purchases of eligible assets costing less than $20,000 which are first used or installed ready for use by 30 June 2019. Assets valued at $20,000 or more (which cannot be immediately deducted) would continue to be placed into the small business simplified depreciation pool and depreciated at 15 per cent in the first income year and 30 per cent each income year thereafter. The pool could be immediately deducted if the balance is less than $20,000 over this period (including existing pools).

Option 3: Extending the immediate deductibility threshold until 30 June 2019 but decreasing it from $20,000 to $10,000

3.18               This option would extend the immediate deductibility measure for a further 12 months, but decrease the threshold so that it applies to eligible assets each costing less than $10,000 (not $20,000).

3.19               Eligible assets valued at $10,000 or more (which could not be immediately deducted) could be placed into the small business simplified depreciation pool and depreciated at the same rates as outlined above under Option 2. The pool could be immediately deducted if the balance is less than $10,000 over this period (including existing pools).

4. Cost benefit analysis of each option / impact analysis

Option 1: No policy change (revert to $1,000 immediate deductibility threshold from 1 July 2018)

3.20               Under this option, the current immediate deductibility threshold will expire and revert back to $1,000 from 1 July 2018.

Benefits

3.21               The benefit of this option is that there would not be a revenue impact over the forward estimates.

Costs

3.22               The cost of this option, however, is that it would not stimulate additional small business investment and growth, given that there would be no additional cash flow benefits and would not reduce red tape for small business.

3.23               Small businesses that use the simplified depreciation rules are required to track assets they depreciate under these provisions to ensure all relevant adjustments are made to the small business pool and the appropriate tax deductions are claimed in their tax returns. Records are required to be kept to substantiate these claims. Under the small business simplified depreciation rules, when assets are added to the small business pool, the small business can claim a deduction for 15 per cent of the asset’s cost. The asset is then depreciated at 30 per cent per annum in the pool, until the pool balance falls below $1,000. At this time, the remaining balance of the pool can be written off.

3.24               Small businesses are generally required to track the cost of the asset, the date it was acquired, the date and cost of the asset at the time it is added to the pool, as well as the details and timing of any subsequent improvements made to the asset. Small businesses also need to be mindful of the proceeds and timing of the sale of the asset, as these can result in additional tax liabilities or deductions.

Option 1 - Net outcome

3.25               While there would not be a cost to revenue over the forward estimates, small business would not be able to access the additional cash flow benefits and red tape savings.

Option 2: Extending the current immediate deductibility threshold until 30 June 2019 at the current $20,000 threshold (preferred option)

3.26               Under this option, the $20,000 immediate deductibility threshold for small businesses would be extended for an extra 12 months until 30 June 2019.

Benefits

3.27               Extending the immediate deductibility threshold until 30 June 2019 promotes small business investment and growth by providing additional cash flow benefits and reducing red tape for small business. It also provides increased certainty as the threshold remains the same for another year.

3.28               Currently, small businesses are able to immediately deduct the cost of asset purchases that are valued at less than $20,000.

3.29               Small businesses tend to be more vulnerable to cash flow problems than larger businesses because their profitability tends to be more volatile and they have lower levels of retained earnings. A $20,000 threshold also has a greater cash flow impact for new small businesses, as large capital expenditures often occur early in the lifecycle of a business.

3.30               Immediate deductibility generally improves cash flow for small businesses by allowing an immediate deduction for the entire cost of an asset costing less than $20,000 in the year that cost is incurred, rather than deducting a proportion of the cost over a number of years under the ordinary depreciation rules. In most instances, this reduces the tax bill of small businesses in the current income year, improving cash flow and allowing them to use the extra funds to reinvest in their business.

3.31               It also results in a compliance saving for small business as they are no longer required to track the annual depreciation for these assets or maintain detailed records substantiating their depreciation claims. Generally, a business would retain the invoice for purchase of the asset and use this as evidence to claim the cost of the asset (the immediate deduction) in their tax return.

3.32               By way of comparison, record keeping if the asset is depreciated under Division 40 of the ITAA 1997 (the general depreciation rules) or using the simplified small business pools is more onerous, and requires depreciation schedules (as well as other information mentioned previously) to be maintained in order to substantiate the depreciation deductions claimed in the tax return.

3.33               Over 300,000 Australian small businesses have taken advantage of the $20,000 instant asset write off according to 2015-16 tax data. Compared to 2014-15, in 2015-16 the number of claims increased by around 60,000 and the average amount claimed increased by $4,100 to $9,000. [4]

3.34               That small businesses are benefiting from the $20,000 instant asset write-off has also been noted previously. On 13 October 2017, the then Minister for Small Business, the Hon Michael McCormack MP, noted that the policy has led to ‘more money in the pockets of small businesses so they can grow their businesses, employ workers and pay them more.’ [5]  

3.35               There is also anecdotal evidence of the benefits that the $20,000 instant asset write-off provides from key stakeholders in the small business community:

•        The Council of Small Business Australia (COSBOA), the national peak body representing the views of Australian small business associations, has congratulated the Government ‘for maintaining their $20,000 instant asset write-off for small businesses. This successful policy should be continued in the 2018-19 Budget. This is an important policy to all small businesses and we believe it must continue going forward.’ (2018-19 Budget Priorities Statement).

3.36               Industry-specific organisations have also noted the success of the $20,000 instant asset write-off.  This suggests that it has had a positive impact in terms of promoting additional investment, especially in capital intensive sectors such as building and construction. For example:

•        Master Builders Australia, the nation’s peak building and construction industry association ‘ recommends accelerated deprecation programs be extended for at least one more year. As a highly capital intensive industry made up of more than 350,000 small and medium sized businesses, the extension of the accelerated depreciation program was a big win for building and construction businesses from the previous Budget (2017) .’ (2018-19 Pre-Budget Submission).

•        Restaurant & Catering Australia (R&CA), the national industry association representing the interests of around 35,000 restaurants, cafes and catering businesses across Australia has noted the following: ‘ Given the strong take-up from businesses, R&CA urges the Commonwealth Government to continue its funding for this program, extending the instant asset write-off program until at least 30 June 2019 .’ (Pre-Budget Submission 2018-19).

Costs

3.37               This option will not increase compliance costs. In fact, compared with the status quo, there will be a decrease in overall compliance costs because it is an existing measure and there are no new requirements associated with the extension for 12 months.

3.38               There is however a financial cost. Extending the measure for an additional 12 months is estimated to have a net cost to revenue of $350 million over the forward estimates.

3.39               Relative to Option 1, this option may involve a negligible change in administration costs as the ATO would need to amend its information resources, such as its website, to communicate that the $20,000 threshold has been extended for a further 12 months.

Option 2 - Net benefit

3.40               The net result is that the significant benefits of improved cash flow (encouraging small businesses to reinvest in and grow their business) and reduced red tape outweigh the revenue costs associated with this option.

3.41               This option will result in an estimated total average annual regulatory saving for businesses of $2.2 million:

Table 3.1 : Regulatory burden estimate (RBE) table (Option 2)

Average annual regulatory costs (from business as usual)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in cost

Total, by sector

-2.2*

n/a

n/a

-2.2

*Average annual impact (calculated over 10 years).

Option 3: Extending the immediate deductibility threshold until 30 June 2019 but decreasing it from $20,000 to $10,000

3.42               This option would extend the immediate deductibility threshold until 30 June 2019 but decrease the threshold to $10,000.

Benefits

3.43               This option would provide small businesses with cash flow benefits as in Option 2 but only in relation to assets costing less than $10,000, which is half the current threshold.

3.44               This option would also reduce compliance costs for small businesses but to a lesser extent than Option 2 (see discussion below).

Costs

3.45               This option would result in a small decrease in compliance costs, resulting in an estimated total average annual regulatory saving for businesses of $0.2 million (see Table 3.2). Small businesses would need to understand and adjust to the change in the new $10,000 immediate deductibility threshold which adds to the compliance burden of this option.

3.46               Small businesses would not be able to access the benefits of immediate deductibility for assets costing between $10,000 and $20,000.

3.47               It would have a lower estimated cost to revenue than a $20,000 immediate deductibility threshold over the forward estimates period.

3.48               Relative to Option 2, this option may also involve a small increase in administration costs as the ATO would need to amend its information resources, such as its website, to communicate to small businesses the lowering of the threshold to $10,000.

Option 3 - Net benefit

3.49               The net result is that the benefits of improved cash flow (encouraging small businesses to reinvest in and grow their business) and reduced red tape outweigh the costs associated with this option, but to a lesser extent than in Option 2.

3.50               This option will result in an estimated total average annual regulatory saving for businesses of $0.2 million:

Table 3.2 : Regulatory burden estimate (RBE) table (Option 3)

Average annual regulatory costs (from business as usual)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in cost

Total, by sector

-0.2*

n/a

n/a

-0.2

*Average annual impact (calculated over 10 years).

5. Consultation plan

3.51               The $20,000 immediate deductibility threshold was introduced in the 2015-16 Budget, following extensive stakeholder consultation, which included the Board of Taxation, the ATO, small business stakeholder groups and professional tax and accounting bodies. It was subsequently extended in the 2017-18 Budget by 12 months to 30 June 2018.

3.52               Stakeholders have provided regular feedback on the effectiveness of the measure, most recently in response to the request for 2018-19 Pre-Budget Submissions. There is strong stakeholder support for extending the $20,000 immediate deductibility threshold, including from stakeholders such as the Australian Chamber of Commerce and Industry, the Council of Small Business of Australia, Master Builders Australia, Chamber of Commerce and Industry Queensland, and Restaurant & Catering Australia. 

6. Option selection / conclusion

3.53               Taking into account the various benefits associated with this proposal, the preferred policy option is to extend the existing $20,000 immediate deductibility threshold for small business for an additional year until 30 June 2019 (Option 2).

7. Implementation and evaluation / review

3.54               Legislation is required to implement this proposal and will be administered by the ATO. Implementation is expected to be straight-forward, as it is a continuation of an existing measure.

3.55               Following the passage of the legislation, Treasury will continue to build into its broader small business consultation processes opportunities to seek views from small businesses about their practical experiences with the $20,000 immediate deductibility threshold over the next 12 months. Treasury will also consider feedback from stakeholders as part of annual pre budget submissions, which are expected to be received by the end of 2018.

3.56               Feedback from the ATO’s engagement with small businesses in implementing the initiative, together with a further 12 months of data, would also be used to assess the benefits of this initiative and to inform the evaluation of the initiative, which would underpin any subsequent decision by government on the appropriate level of the threshold for the instant asset write-off.




[1] 2014-15 Budget Paper 1 pages 2-11.

[2] The Economic Trends , Challenges and Behaviour of Small Businesses in Australia, Reserve Bank of Australia, 2014.

[3] Payment Times and Practices Inquiry - Final Report , Australian Small Business and Family Enterprise Ombudsman, 2017.

[4] ATO income tax return data for the 2015-16 income year.

[5] The Hon Michael McCormack MP, then Minister for Small Business, ‘300,000 small businesses benefit from instant asset write-off’, Media Release, 13 October 2017.