Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Treasury Laws Amendment (Lower Taxes for Small and Medium Businesses) Bill 2018

Bill home page  


Download WordDownload Word


Download PDFDownload PDF

2016-2017-2018

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Treasury Laws Amendment (Lower Taxes for Small and Medium Businesses) Bill 2018

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the

Treasurer, the Hon. Josh Frydenberg MP)

 

 



Table of contents

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

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

Chapter 1 ........... Lower tax rates for small and medium companies........ 5

Chapter 2 ........... Increased income tax offsets for unincorporated small businesses         9

Chapter 3 ........... Statement of Compatibility with Human Rights.......... 13

 

 



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

Abbreviation

Definition

Bill

Treasury Laws Amendment (Lower Taxes for Small and Medium Businesses) Bill 2018

Enterprise Tax Plan Act

Treasury Laws Amendment (Enterprise Tax Plan) Act 2017

ITAA 1997

Income Tax Assessment Act 1997

 

 



Lower tax rates for small and medium businesses

Schedule 1 to the Bill amends the Enterprise Tax Plan Act to accelerate the reduction of the corporate tax rate for corporate tax entities that are base rate entities — that is, corporate tax entities that derive no more than 80 per cent of their income in passive forms and have an aggregated turnover of less than $50 million.

The corporate tax rate for base rate entities will be reduced from 27.5 per cent to 26 per cent in 2020-21 before being cut to 25 per cent for the 2021-22 income year and later income years.

Schedule 2 to the Bill amends the Enterprise Tax Plan Act to increase the small business income tax offset rate to 13 per cent of an eligible individual’s basic income tax liability that relates to their total net small business income for the 2020-21 income year.

The small business income tax offset rate will then be increased to 16 per cent for the 2021-22 income year and later income years.

The small business income tax offset continues to be capped at $1,000 per individual per year.

Bringing forward the tax cuts for small and medium businesses will benefit around 3.3 million businesses employing 6.6 million Australians.

Date of effect The corporate tax rate will be reduced for base rate entities from the 2020-21 income year. The increase to the rate of the small business income tax offset will also apply from the 2020-21 income year.

Proposal announced The Government indicated that it would accelerate tax cuts for small and medium businesses on 22 August 2018.

Financial impact These amendments are estimated to have the following revenue implications ($m):

2018-19

2019-20

2020-21

2021-22

-

-

-$1,200

-$2,000

Human rights implications :  The Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 3, paragraphs 3.1 to 3.7.

Compliance cost impact Nil.

 



Chapter 1          

Lower tax rates for small and medium companies

Outline of chapter

1.1                   Schedule 1 to the Bill amends the Enterprise Tax Plan Act to accelerate the reduction of the corporate tax rate for corporate tax entities that are base rate entities — that is, corporate tax entities that derive no more than 80 per cent of their income in passive forms and have an aggregated turnover of less than $50 million.

1.2                   The corporate tax rate for base rate entities will be reduced from 27.5 per cent to 26 per cent in 2020-21 before being cut to 25 per cent for the 2021-22 income year and later income years.

Context of amendments

1.3                   The Enterprise Tax Plan Act amended the Income Tax Rates Act 1986 to reduce the corporate tax rate to 27.5 per cent for the 2016-17 income year for corporate tax entities that were small business entities with an aggregated turnover of less than $10 million.

1.4                   From the 2017-18 income year, the 27.5 per cent corporate tax rate began to apply to corporate tax entities that were base rate entities. This increased the aggregated turnover threshold that applied for the 27.5 per cent corporate tax rate from $10 million (for the 2016-17 income year) to:

•        $25 million for the 2017-18 income year; and

•        $50 million for the 2018-19 income year and later income years.

1.5                   The Enterprise Tax Plan Act also provided that the corporate tax rate would be reduced further for base rate entities with an aggregated turnover of less than $50 million to:

•        27 per cent for the 2024-25 income year;

•        26 per cent for the 2025-26 income year; and

•        25 per cent for the 2026-27 income year and later income years.

Summary of new law

1.6                   Schedule 1 to the Bill amends the Enterprise Tax Plan Act to accelerate the reduction of the corporate tax rate for base rate entities. The corporate tax rate for base rate entities will be:

•        26 per cent for the 2020-21 income year; and

•        25 per cent for the 2021-22 income year and later income years.

1.7                   Reducing the tax burden on these businesses will increase the incentive for companies to undertake new investment. By bringing the previously enacted tax cuts forward, the Bill allows the benefits of the tax cuts to be realised sooner.

Comparison of key features of new law and current law

New law

Current law

The corporate tax rate for base rate entities will be:

•        27.5 per cent for the 2018-19 and 2019-20 income years (no change to the current law);

•        26 per cent for the 2020-21 income year; and

•        25 per cent for the 2021-22 income year and later income years.

For the income years 2018-19 to 2023-24, the corporate tax rate for base rate entities with an aggregated turnover of less than $50 million will be 27.5   per cent.

The corporate tax rate will then be:

•        27 per cent for the 2024-25 income year;

•        26 per cent for the 2025-26 income year; and

•        25 per cent for the 2026-27 income year and later income years.

Detailed explanation of new law

1.8                   Schedule 1 to the Bill amends the Enterprise Tax Plan Act to accelerate the reduction of the corporate tax rate to 26 per cent for the 2020-21 income year for corporate tax entities that are base rate entities — that is, corporate tax entities that derive no more than 80 per cent of their income in passive forms and have an aggregated turnover of less than $50 million. [Schedule 1, items 1 and 3, table items 5 and 6 in subsection 2(1) of the Enterprise Tax Plan Act, and Parts 9 and 10 of Schedule 1 to that Act]

1.9                   The corporate tax rate for base rate entities will then be cut to 25 per cent for the 2021-22 income year and later income years. [Schedule 1, item 1, table item 7 in subsection 2(1) of the Enterprise Tax Plan Act]

Consequential amendments

1.10               Consequential amendments are made to the Enterprise Tax Plan Act to accelerate the implementation of consequential amendments to the carry forward tax offset rules in Division 65 of the ITAA 1997. [Schedule 1, items 1 and 5, table items 20, 21 and 22 in subsection 2(1) of the Enterprise Tax Plan Act, and Parts 4 and 5 of Schedule 5 to that Act]

1.11               Amendments are made to various headings in the Enterprise Tax Plan Act to reflect the accelerated implementation of the corporate tax rate cuts for base rate entities. [Schedule 1, items 3 to 6, the headings to Parts 10 and 11 of Schedule 1, and Parts 5 and 6 of Schedule 5, to the Enterprise Tax Plan Act]

Application and transitional provisions

1.12               The amendments that relate to the reduction of the corporate tax rate for base rate entities from 27.5 to 26 per cent will apply for the 2020-21 income year. [Schedule 1, item 7, subitems 57(9) and (10) of Schedule 1 to the Enterprise Tax Plan Act]

1.13               The amendments that relate to the reduction of the corporate tax rate for base rate entities from 26 per cent to 25 per cent will apply for the 2021-22 income year and later income years. [Schedule 1, item 7, subitem 57(11) of Schedule 1 to the Enterprise Tax Plan Act]



Outline of chapter

2.1                   Schedule 2 to the Bill amends the Enterprise Tax Plan Act to increase the small business income tax offset rate to 13 per cent of an eligible individual’s basic income tax liability that relates to their total net small business income for the 2020-21 income year.

2.2                   The small business income tax offset rate will then be increased to 16 per cent for the 2021-22 income year and later income years.

2.3                   The small business income tax offset continues to be capped at $1,000 per individual per year.

Context of amendments

2.4                   The Government introduced the small business income tax offset in the 2015-16 income year as part of a range of tax measures to help small businesses in the 2015-16 Budget. It entitled individuals who were small business entities, or who were liable to pay income tax on a share of the income of a small business entity, to a tax offset equal to 5 per cent of their basic income tax liability that related to their total net small business income, capped at $1,000 (see Subdivision 328-F of the ITAA 1997).

2.5                   The small business income tax offset provided unincorporated small businesses with a tax offset broadly equivalent to the small business company tax rate cut of 1.5 per cent that was also introduced in the 2015-16 income year.

2.6                   The Enterprise Tax Plan Act increased the rate of the small business income tax offset to minimise tax distortions between the different entity types through which small businesses may be run. This was intended to help provide small businesses that are run through unincorporated entities with an increase in their cash flow.

2.7                   The Enterprise Tax Plan Act provided for the following small business income tax offset rates:

•        8 per cent for the 2016-17 to 2023-24 income years;

•        10 per cent for the 2024-25 income year;

•        13 per cent for the 2025-26 income year;

•        16 per cent for the 2026-27 income year and later income years.

2.8                   The Enterprise Tax Plan Act also increased the small business aggregated turnover threshold for the small business income tax offset from $2 million for the 2015-16 income year to $5 million for the 2016-17 income year and later income years.

Summary of new law

2.9                   Schedule 2 to the Bill amends the Enterprise Tax Plan Act to accelerate the increases to the rate of the small business income tax offset. The amended small business income tax offset rates are:

•        13 per cent for the 2020-21 income year; and

•        16 per cent for the 2021-22 income year and later income years.

2.10               Accelerating the increases to the rate of the small business income tax offset for unincorporated small businesses will help provide increased cash flow for profitable unincorporated businesses.

Comparison of key features of new law and current law

New law

Current law

The small business income tax offset rate will be:

•        8 per cent for the 2018-19 and 2019-20 income years (no change to the current law) ;

•        13 per cent for the 2020-21 income year; and

•        16 per cent for the 2021-22 income year and later income years.

For the 2018-19 to 2023-24 income years, the small business income tax offset rate will be 8 per cent.

The small business income tax offset rate will then increase to:

•        10 per cent for the 2024-25 income year;

•        13 per cent for the 2025-26 income year; and

•        16 per cent for the 2026-27 income year and later income years.

Detailed explanation of new law

Small business income tax offset rate increased to 13 per cent for the 2020-21 income year

2.11               The small business income tax offset rate will be increased to 13 per cent of an eligible individual’s basic income tax liability that relates to their total net small business income for the 2020-21 income year. [Schedule 2, items 1 and 2, table items 10 and 11 in subsection 2(1) of the Enterprise Tax Plan Act, and Parts 2 and 3 of Schedule 2 to that Act]

2.12               The increase in the small business income tax offset rate to 13 per cent will coincide with the reduction of the corporate tax rate to 26 per cent applying to base rate entities for the 2020-21 income year (see paragraph 1.8).

Small business income tax offset rate increased to 16 per cent for the 2021-22 income year

2.13               The small business income tax offset rate will then be increased to 16 per cent of an eligible individual’s basic income tax liability that relates to their total net small business income for the 2021-22 income year and later income years. [Schedule 2, items 1 and 3, table item 12 in subsection 2(1) of the Enterprise Tax Plan Act and the heading to Part 4 of Schedule 2 to that Act]

2.14               The increase in the small business income tax offset rate to 16 per cent will coincide with the reduction of the corporate tax rate to 25 per cent applying to base rate entities for the 2021-22 income year and later income years (see paragraph 1.9).

2.15               These amendments provide small businesses that do not pay the corporate tax rate with an increased small business income tax offset rate that is broadly equivalent to the reductions in the company tax rate.

Consequential amendments

2.16               Amendments are made to various headings in the Enterprise Tax Plan Act to reflect the accelerated implementation of the increases to the small business income tax offset rate. [Schedule 2, items 2 and 3, the headings to Parts 3 and 4 of Schedule 2 to the Enterprise Tax Plan Act]

Application and transitional provisions

2.17               The amendments that relate to the increase of the small business income tax offset rate from 8 per cent to 13 per cent will apply for the 2020-21 income year. [Schedule 2, item 4, subitems 5(2) and (3) of Schedule 2 to the Enterprise Tax Plan Act]

2.18               The amendments that relate to the increase of the small business tax offset rate from 13 per cent to 16 per cent will apply for the 2021­-22 income year and later income years. [Schedule 2, item 4, subitem 5(4) of Schedule 2 to the Enterprise Tax Plan Act]



Chapter 3          

Statement of Compatibility with Human Rights

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

Lower tax rates for small and medium businesses

3.1                   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

3.2                   Schedule 1 to the Bill amends the Enterprise Tax Plan Act to accelerate the reduction of the corporate tax rate for corporate tax entities that are base rate entities — that is, corporate tax entities that derive no more than 80 per cent of their income in passive forms and have an aggregated turnover of less than $50 million.

3.3                   The corporate tax rate for base rate entities will be reduced from 27.5 per cent to 26 per cent in 2020-21 before being cut to 25 per cent for the 2021-22 income year and later income years.

3.4                   Schedule 2 to the Bill amends the Enterprise Tax Plan Act to increase the small business income tax offset rate to 13 per cent of an eligible individual’s basic income tax liability that relates to their total net small business income for the 2020-21 income year.

3.5                   The small business income tax offset rate will then be increased to 16 per cent for the 2021-22 income year and later income years.

3.6                   The small business income tax offset continues to be capped at $1,000 per individual per year.

Human rights implications

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

Conclusion

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