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Tax Laws Amendment (Small Business Measures No. 3) Bill 2015



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ISSN 1328-8091

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BILLS DIGEST NO. 8, 2015-16 12 AUGUST 2015

Tax Laws Amendment (Small Business Measures No. 3) Bill 2015 Bernard Pulle and Elizabeth Wakerly Economics Section

Contents

The Bills Digest at a glance ................................................... 2

Purpose of the Bill ............................................................... 3

Structure of the Bill ............................................................. 3

Background ......................................................................... 3

Policy announcements and related measures ........................ 3

Definition of small business ..................................................... 4

Context of amendments .......................................................... 4

Schedule 1 — Tax discount for unincorporated small businesses ............................................................................. 5

Schedule 2 — Immediate deductibility for small business start-up expenses ................................................... 6

Schedule 3 — FBT and portable electronic devices .............. 7

Committee consideration .................................................... 8

Policy position of non-government parties ........................... 8

Position of major interest groups ......................................... 8

Financial implications ........................................................ 10

Statement of Compatibility with Human Rights .................. 10

Key issues and provisions................................................... 10

Schedule 1—Tax discount for unincorporated small businesses .............................................................................. 10

Schedule 2— Immediate deductibility for small business start-up expenses .................................................................. 11

Schedule 3—FBT and portable electronic devices ................ 11

Date introduced: 24 June 2015

House: House of Representatives

Portfolio: Treasury

Commencement: On Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website.

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The Bills Digest at a glance

Purpose of the Bill

• The purpose of the Bill is to amend:

- the Income Tax Assessment Act 1997 to: provide a five per cent tax offset to individuals who run small businesses, or who have a share of a small business’s income included in their assessable income; and enable small businesses and individuals to immediately deduct certain costs incurred when starting up a business and

- the Fringe Benefits Tax Assessment Act 1986 to extend the fringe benefits tax exemption that applies to employers that provide employees with work-related portable electronic devices.

Background

• This Bill covers three measures announced by the Government as part of a broader ‘Growing Jobs and Small Business’ package in the 2015-16 Budget.

Proposed measures

• Schedule 1 provides a tax offset to an individual who carries on an unincorporated small business entity (businesses with an aggregate turnover of less than $2 million) or an individual whose assessable income includes a share of the net income of an unincorporated small business entity such as a partnership. The amount of the tax offset is five per cent of the income tax payable on the portion of an individual’s income that is small business income. The maximum amount of the tax offset available to an individual in an income year is capped at $1,000.

• Schedule 2 amends the Income Tax Assessment Act 1997 to allow small businesses and individuals to immediately deduct certain costs incurred when starting up a business, including government fees and charges as well as costs associated with raising capital, that are presently only deductible over five years.

• Schedule 3 to the Bill extends the fringe benefits tax (FBT) exemption that applies to employers that provide employees with work-related portable electronic devices. The amendments extend the exemption to small businesses that provide employees with more than one work-related portable electronic device, even where the devices have substantially identical functions.

Views of interest groups and non-government parties

• All major parties and stakeholders are supportive of the measures, although some are calling for the tax concessions to go further.

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Purpose of the Bill The purpose of the Tax Laws Amendment (Small Business Measures No. 3) Bill 2015 (the Bill) is to amend:

• the Income Tax Assessment Act 19971 (ITAA 1997) to

- provide a tax offset to individuals who run small businesses with an aggregate annual turnover of less than $2 million or who have a share of a small business’s income included in their assessable income - enable small businesses and individuals to immediately deduct certain costs incurred when setting up a business • the Fringe Benefits Tax Assessment Act 19862 (FBTAA 1986) to extend the fringe benefits tax (FBT) exemption

that applies to employers that provide employees with work-related portable electronic devices.

Structure of the Bill This Bill has three schedules:

• Schedule 1 of the Bill will amend the income tax laws to provide a tax offset (the small business income tax offset) to individuals who run small businesses (businesses with an aggregate annual turnover of less than $2 million) or who pay income tax on a share of the income of a small business. The amount of the offset is five per cent of the income tax payable on the portion of an individual’s income that is small business income. The maximum amount of the tax offset available to an individual in an income year is capped at $1,000. The measure applies from the 2015-16 income year.

• Schedule 2 of the Bill will amend the ITAA 1997 to allow taxpayers who are not in business or are a small business entity to immediately deduct certain expenses relating to the proposed structure or operation of a business. The expenses must relate to a business that is proposed to be carried on, including certain government fees and charges and costs associated with raising capital. These expenses are presently deductible over five years.

• Schedule 3 of the Bill will extend the FBT exemption that currently applies to employers that provide employees with work-related portable electronic devices such as mobile phones, laptops and tablets. This exemption currently only applies to more than one substantially identical device where one device is a replacement for the other. The amendments will extend the exemption beyond simple replacement devices for small businesses that provide employees with more than one work-related portable electronic device, even where the devices have substantially identical functions.

Background Policy announcements and related measures This Bill covers three measures announced by the Government as part of a broader ‘Growing Jobs and Small Business’ package, announced in the 2015-16 Budget.3

The proposals, as announced in the 2015-16 Budget on 12 May 2015 were for:

• a five per cent tax offset (capped at $1,000 per income year) from 1 July 2015 to individuals who run small businesses or who pay income tax on a share of the income of a small business

• immediate deductibility of a range of expenses associated with starting up a business and

• an extension of the fringe benefits tax (FBT) exemption that applies to employers that provide employees with portable work-related portable electronic devices.4

Other elements of the package, which are being implemented by other Bills, included:

• a reduction in the company tax rate to 28.5 per cent for small businesses from 1 July 20155

1. Income Tax Assessment Act 1997, accessed 29 July 2015. 2. Fringe Benefits Tax Assessment Act 1986, accessed 29 July 2015. 3. T Abbott (Prime Minister), J Hockey (Treasurer) and B Billson (Minister for Small Business), Growing jobs and small business package to help small businesses invest more, grow more, and employ more, joint media release, 12 May 2015, accessed 30 July 2015. See also Australian

Government, Budget 2015: growing jobs and small business, 2015, accessed 30 July 2015. 4. Australian Government, Budget measures: budget paper no. 2: 2015-16, 2015, pp. 17-19, accessed 30 July 2015.

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• small businesses with annual turnover below $2 million will be able to fully and immediately deduct the expenditure on every asset they acquire that is valued up to $20,000 for tax purposes—an increase from the current $1,000 threshold6

• reforms to Capital Gains Tax (CGT) rollover will enable small businesses to change the legal structure of their business without incurring a CGT liability and

• expanded tax concessions for employee share schemes from 1 July 2015

• removing obstacles to crowd sourced equity funding and

• streamlining business registration processes.7

Definition of small business The definition of small business relevant to this Bill relies on the definition in the ITAA 1997 of a small business entity. A business will be a small business entity in the current financial year if:

• it is carrying on a business in the current year and

• one or both of the following applies:

- if the business was carried on in the previous year before the current year and the aggregated turnover for the previous year was less than $2 million or - the aggregated turnover for the current year is likely to be less than $2 million.8 In 2012-13, there were 298,225 taxable entities meeting this definition of a small business, of which 288,810 were profitable.9 Of these entities, over half operated in financial and insurance services, rental hiring and real estate services and professional, scientific and technical services.10 On average, the most profitable industries in which these entities operated were financial and insurance services, mining and agriculture, forestry and fishing.

Context of amendments There are a number of arguments both for and against concessional tax treatment for small businesses. A summary is provided in the Bills Digest for the Tax Laws Amendment (Small Business Measures No. 1) Bill 2015.11

The regulation impact statement contained in the Explanatory Memorandum to the Bill notes that:

while small businesses have played a significant role in the Australian economy, they also face a unique set of operational challenges, and as a consequence typically have higher failure rates than those for larger companies.

… A further challenge for small companies is access to finance. 12

In particular:

Small businesses are typically more vulnerable to shocks and changes in economic conditions than larger businesses. This makes it particularly important that, during this period of economic transition, policy settings support small business growth and innovation. 13

5. See Parliament of Australia, ‘Tax Laws Amendment (Small Business Measures No. 1) Bill 2015 homepage’, Australian Parliament website, for the Bill, the relevant Explanatory Memorandum and the Bills Digest. The Tax Laws Amendment (Small Business Measures No. 1) Act 2015 received Royal Assent on 22 June 2015, accessed 12 August 2015.

6. See Parliament of Australia, ‘Tax Laws Amendment (Small Business Measures No. 2) Bill 2015 homepage’ Australian Parliament website, for the Bill, the relevant Explanatory Memorandum and the Bills Digest. The Tax Laws Amendment (Small Business Measures No. 2) Act 2015 received Royal Assent on 22 June 2015, accessed 12 August 2015.

7. Budget 2015: growing jobs and small business, 2015, op. cit. 8. Income Tax Assessment Act 1997, section 328-110, accessed 31 July 2015. 9. Australian Taxation Office (ATO), ‘Table 5: companies: selected items and financial ratios, by company size, taxable status, profit status and broad industry, 2012-13 income year’, ATO website, accessed 30 July 2015. The ATO taxation statistics define businesses with a turnover of

less than $2 million as ‘micro’ businesses. 10. See Table 1 in K Swoboda, Tax Laws Amendment (Small Business Measures No. 1) Bill 2015, Bills digest, 116, 2014-15, Parliamentary Library, Canberra, 2015, accessed 5 August 2015. 11. Tax Laws Amendment (Small Business Measures No. 1) Bill 2015, Bills digest, op. cit. 12. Explanatory Memorandum, Tax Laws Amendment (Small Business Measures No. 3) Bill 2015, p. 33, accessed 12 August 2015.

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According to the Australian Bureau of Statistics (ABS), small businesses comprise 95.9 per cent of all businesses, and employ approximately 4.8 million people or 45.7 per cent of the private sector work force.14

In terms of the contribution of small business to the Australian economy, a recent report by the Productivity Commission noted that small businesses (defined as those with fewer than 20 employees) were less likely to engage in innovative activity than larger businesses: only one per cent of small businesses introduced an innovative product or service that was ‘new to Australia’ in 2012-13 (compared with 14 per cent of large businesses).15

These findings are supported by the ABS Innovation in Australian Business, 2012-13 survey, which found that the likelihood that a business engages in innovative activity increases as the size of the business— measured by employment size— increases.16

In March 2015, the Government published a tax discussion paper which raised some specific issues relating to small businesses, including legal structure, interaction between the personal and business tax systems, compliance costs and small business tax concessions.17 The study noted that differential tax concessions to small businesses are designed to address multiple concerns about compliance costs, risk aversion and adequate access to capital, or to correct ‘disadvantages of being small’ and to support job creation.18 But the additional concessions add to compliance costs and complexity of the system and may cancel out any perceived benefits. The creation of new concessions and regular changes to the tax law require small businesses to continuously monitor the tax law and adapt to any changes. The paper suggests:

Instead of multiple concessions across the tax system, an alternative option that could be considered is to apply a lower or zero tax rate for small businesses. A lower rate that replaced multiple specific concessions could encourage small businesses to spend their resources expanding their business, rather than managing their tax affairs. 19

Schedule 1 — Tax discount for unincorporated small businesses In the 2015-16 Budget, the Government announced a number of measures as part of a jobs and small business package, including providing a tax discount to unincorporated small businesses broadly equivalent to the small business company tax rate cut of 1.5 per cent. Reducing the rate of company tax for incorporated small businesses without offering a tax cut for unincorporated entities might have encouraged small business owners to structure their business differently from how they would prefer in order to gain a tax advantage. Business owners may choose not to incorporate because the reporting requirements are less onerous or because they desire more flexibility in how they operate their business. For businesses operated by a sole trader (through a partnership or through a trust), the business income is usually taxed at the marginal rate of personal income tax of the business owner.

Citing a 2014 study by the University of NSW and Chartered Accountants of Australia and New Zealand, the recent Government tax discussion paper notes that tax compliance costs are higher per dollar of turnover for smaller businesses than they are for larger business.20 The 2013 Productivity Commission (PC) report on Regulator Engagement with Small Business noted that:

Small businesses feel the burden of regulation more strongly than other businesses. Almost universally, their lack of staff, time and resources present challenges in understanding and fulfilling compliance obligations.

13. Ibid., p. 34. 14. Australian Small Business Commissioner, Productivity Commission regulator engagement with small business: submission by the Office of the Australian Small Business Commissioner, March 2013, p. 2, accessed 6 August 2015. 15. Productivity Commission, Business set-up, transfer and closure, Productivity Commission draft report, Canberra, ACT, May 2015, pp. 4-5,

accessed 6 August 2015. 16. Australian Bureau of Statistics, Innovation in Australian Business, 2012-13, 21 August 2014, accessed 11 August 2015. 17. Australian Government, Re:think - Tax discussion paper, March 2015, pp. 105-120, accessed 7 August 2015. 18. Ibid., p. 114. 19. Ibid., p. 119. 20. Ibid., pp. 112-113, accessed 30 July 2015.

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Governments and regulators should provide different treatment for small business when net benefits to the community would be enhanced (from Recommendation 8).

Given small businesses generally have less capacity to distil regulatory requirements and higher compliance cost structures, regulators should, where possible, remove any unnecessary complexity in regulatory requirements and associated guidance material (from Recommendation 9). 21

In a submission to the PC, the Australian Small Business Commissioner notes that ‘it is the experience of my Office that access to finance is still an issue for some small businesses, especially start-ups’.22 These views are supported by the Chamber of Commerce and Industry Queensland:

Access to finance is a significant issue for all small business looking to invest and grow, and is particularly difficult for entrepreneurs that are looking to fund a new idea. 23

The tax discount for unincorporated small businesses will help to improve their cash flow by reducing the amount of tax payable in the financial year and help to alleviate higher regulatory costs. It may also help some small businesses to secure finance and render previously marginal activities (more) profitable.24 Although capped at $1,000 a year, the cash-flow from the discount can be re-invested in the business, which, when combined with other small business measures, could lead to potentially higher employment and wages.25

The Government estimates some transitional compliance costs for the 1.5 million unincorporated small business entities and 785,000 individuals who receive distributions from trusts and partnerships, assessed at $14.8 million per year.26

Schedule 2 — Immediate deductibility for small business start-up expenses The tax law draws a distinction between income and capital. Taxpayers carrying on a business can deduct from their assessable income any losses or outgoings which are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. Section 40-880 of the ITAA 1997 currently allows entities to deduct over a five-year period capital expenditure they incur for the purposes of a business, including expenses relating to establishing a proposed business.

Schedule 2 to this Bill will amend the ITAA 1997 to allow taxpayers who are not in business or are a small business entity to immediately deduct certain start-up expenses relating to the proposed structure or operation of a business. The amendments do not amend the scope of what is currently deductible; they bring forward the time at which certain deductible expenditure can be recognised.

According to the Explanatory Memorandum, the amendments limit immediate deductibility to:

• expenditure on advice or services relating to the structure or operation of the proposed business, including

- advice relating to business structure from a lawyer or accountant and services provided in setting up legal arrangements or business systems - professional advice on the viability of the proposed business and the development of a business plan and - the costs associated with raising capital including costs incurred in accessing crowd-sourced equity

funding (but not the direct costs of the capital itself) and • payments of taxes, fees or charges relating to establishing the business or its structure made to an Australian government agency including:27

21. Productivity Commission, Regulator engagement with small business, Research report, the Commission, Canberra, September 2013, pp. 2 and 22, accessed 6 August 2015. 22. M Brennan (Australian Small Business Commissioner), Observation to Productivity Commission, Inquiry into business set-up, transfer and closure, Australian Small Business Commissioner, Canberra, 8 July 2015, accessed 6 August 2015. 23. N Behrens (Director, Advocacy and Workplace Relations), Feedback to Productivity Commission, Inquiry into business set-up, transfer and

closure, Chamber of Commerce and Industry Queensland, 3 July 2015, accessed 6 August 2015. 24. Note, however, that the PC draft report (Business set-up, transfer and closure) did not identify access to finance as a problem facing most new businesses (see Business set-up, transfer and closure, op. cit., p. 112). 25. Explanatory Memorandum, op. cit., p. 40. 26. Explanatory Memorandum, op. cit., p. 37.

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- the costs associated with creating the entity that may operate the business (for example, the fee for creating a company) and - the costs associated with transferring assets to the entity which is intended to carry on the proposed business (for example, the payment of stamp duty).28

Schedule 3 — FBT and portable electronic devices FBT, introduced in 1986, is

… a tax employers pay on certain benefits they provide to their employees, including their employees’ family or other associates. The benefit may be in addition to, or part of, their salary or wages package. 29

FBT is calculated under the FBTAA 1986. It is separate from income tax and is calculated on the grossed up taxable value of the fringe benefits provided. A benefit that is exempt is not a fringe benefit, and so is not included in calculating an employer’s FBT liability.

On 20 January 2015, the Government announced the release of the Board of Taxation’s report on its review of tax impediments facing small business.30 Among the observations and recommendations were the following:

The frequency with which FBT issues were raised by stakeholders suggests FBT creates a significant and disproportionate compliance burden for small businesses. A number of options to relieve some of this burden were suggested. 31

The Government response stated:

The Government supports reducing the regulatory burden on small business and will consider FBT in the context of the Tax White Paper. 32

In its submission to the Government’s discussion paper, Chartered Accountants of Australia and New Zealand noted that although small business represents a large share of all businesses, it is not as productive as it could be.33 In the case of FBT,

FBT is a ‘drag net’ tax - employers spend most of their efforts ensuring they qualify for the many exemptions. 34

Currently, a number of items are exempt from FBT. These include ‘portable electronic device such as mobile phone, laptop, portable printer and GPS navigation receiver’. However, this exemption is limited to one item per FBT year for ‘items that have a substantially identical function, unless the item is a replacement item’.35 The exemption is limited to items primarily for work-related use (subsection 58X(2) of the FBTAA 1986).

‘Substantially identical function’ refers to the features or design specifications, not the intended use of the items. For example, where a tablet computer can perform the functions of a laptop computer, it would be considered to have substantially identical functions to a laptop computer. Where a tablet computer is designed primarily as a means of digital media consumption (rather than creation) it would not have substantially identical functions to a laptop.

27. Australian government agency (as defined in the Dictionary at section 995-1 of the ITAA 1997) means a Commonwealth, a state or territory or an authority thereof (including local governments). 28. Explanatory Memorandum, op. cit., pp. 45-46. 29. Australian Taxation Office (ATO), ‘Fringe benefits tax (FBT)’, ATO website, accessed 30 July 2015. 30. The Board of Taxation, Review of tax impediments facing small business: a report to the Government, Treasury, Canberra, August 2014,

accessed 30 July 2015. 31. Ibid., p. 101. 32. Australian Government, ‘Government response to the Board of Taxation’s review into tax impediments facing small business’, Treasury,

Canberra, 20 January 2015, accessed 30 July 2015. 33. R Ward (Head of Leadership and Advocacy), Submission to ATO, Re:think - tax discussion paper, Chartered Accountants of Australia and New Zealand, Sydney, 12 June 2015, p. 56, accessed 7 August 2015. 34. Ibid., p. 61. 35. ATO, ‘Fringe benefits tax (FBT): work-related items exempt from FBT’, ATO website, accessed 30 July 2015.

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The distinction between replacement items and other substantially identical items and the operation of the ‘substantially identical functions test’ impose significant compliance costs on small businesses as the distinctions are uncertain and difficult to apply.

Schedule 3 of the Bill will remove the substantially identical functions limitation on the FBT exemption for work-related portable electronic devices, for small business entities.

To be entitled to the exemption, an employer will need to be a small business entity for the purposes of the relevant FBT year in which they provide the portable electronic device. The FBT year starts on 1 April and ends on 31 March. In contrast, the definition of a small business looks at whether a business is a small business entity for an income year (1 July to 30 June). The amendments apply to an employer for an FBT year if the employer was a small business entity for either or both of:

• the year of income starting most recently after the start of the FBT year or

• the year of income ending most recently after the start of the FBT year.36

Committee consideration At the time of writing this Bills Digest, the Senate Standing Committee for the Scrutiny of Bills had not commented on the Bill. The Bill had not been referred to any other Committee for consideration.

Policy position of non-government parties In his budget reply speech on 14 May 2015, the Leader of the Opposition, Bill Shorten, indicated that the Australian Labor Party would support the small business measures announced in the 2015-16 Budget.37 He encouraged the Government to reduce the tax rate for Australian small business further to 25 per cent.38

The Australian Greens welcomed the proposal for the small business company tax cut following the release of the Budget.39 Their 2013 election policy proposed a reduction in the company tax rate to 28 per cent from 1 July 2014 for companies with a turnover of under $2 million.40

Position of major interest groups The Business Council of Australia Chief Executive, Jennifer Westacott, supported the small business measures, but was keen to continue reform:

The budget is without doubt a shot in the arm to small business, and creates a better environment for business confidence that will drive investment, job creation and economic growth.

… The small business package provides some welcome relief by assisting start-ups and helping to keep small enterprises to be competitive.

.. While a two-tier company tax rate is not ideal, the impact of these measures is confined to a small part of the economy. It is important for both major parties to remain committed to a lower, more internationally competitive company tax rate for all businesses as fiscal circumstances permit. 41

Kate Carnell AO, CEO of the Australian Chamber of Commerce and Industry, welcomed the small business measures in the Budget:

With more than seven in 10 Australian small businesses unincorporated, it was concerning that they would miss out on the benefit of the 1.5 percentage point cut in company tax for businesses with a turnover of less than $2 million.

36. Item 2 of Schedule 3 to the Bill, inserting subsection 58(4) into the Fringe Benefits Tax Assessment Act 1986. 37. B Shorten, ‘Second reading speech: Appropriation Bill (No. 1) 2015-16’, House of Representatives, Debates, 14 May 2015, p. 4185, accessed 6 August 2015. 38. Ibid.

39. P Whish-Wilson, Small business package puts back what the Government took away, media release, 13 May 2015, accessed 6 August 2015. 40. Australian Greens, Standing up for small business: lower tax and a stronger voice, Australian Greens policy document, August 2013, accessed 7 August 2015. 41. Business Council of Australia, Statement on the 2015-16 Federal Budget, media release, 12 May 2015, accessed 7 August 2015.

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It is encouraging that the government is looking after those 1.7 million unincorporated small businesses, including tradies, sole operators and partnerships, with other support. Making it easier for small businesses to claim tax deductions for their expenses will make it easier for small businesses to invest.

These deductions are particular[ly] powerful when combined with recently announced measures to help new businesses, including allowing new start-ups to immediately deduct professional costs, such as for legal and accounting services, as well as streamlined company registration and removing barriers to crowd-sourced equity funding.

42

Australian Industry Group Chief Executive Innes Willox issued a statement that was supportive of the small business measures:

The package of business tax measures, while limited to businesses with turnover of less than $2 million, will provide a timely lift in incentives for small businesses to grow, invest and create jobs.

…The measures to streamline business registration; remove tax barriers to small business restructuring; and allow immediate deductions for certain start-up expenses are sensible initiatives. They will boost new business creation; reduce regulatory burdens; give business owners more time to spend on their businesses; and generate new opportunities for growth.

43

Peter Strong, CEO of the Council of Small Business Organisations of Australia, mentioned the five per cent discount for unincorporated small business as a ‘highlight of the budget’:

The depth of announcements in the budget shows that the government understands that it is the little changes as well as the big ticket items that make a difference. The small business person’s capacity to start up, operate and if desired grow their business has been enhanced. 44

Chartered Accountants Australia and New Zealand welcomed the small business measures, but argued for a tax cut ‘across the board’ and ‘a plan to lower it over successive budgets to 25 per cent’.

The cost of setting up a business will be reduced with legal and accounting advice being written off and the process to register a business simplified. This should boost innovative start-ups and create yet more energy in the engine room of the economy. 45

42. Australian Chamber of Commerce and Industry (ACCI), Small business welcomes support in budget, media release, 12 May 2015, accessed 7 August 2015. 43. I Willox (Chief Executive, Australian Industry Group), Constrained budget heading in the right direction, media release, 12 May 2015, accessed 7 August 2015. 44. Council of Small Business Organisations of Australia (COSBOA), Budget extraordinaire shows respect for people in business, media release,

12 May 2015, accessed 7 August 2015. 45. Chartered Accountants Australia and New Zealand, Healthy housekeeping but few plans for success, media release, 12 May 2015, accessed 7 August 2015.

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Financial implications The Explanatory Memorandum outlines the financial impact of the measures which are estimated to be $1,830 million over the four years to 2018-19 (Table 1).

Table 1 Financial impact of (i) the small business income tax offset (ii) immediate deductibility for small business start-up expenses and (iii) extension of the fringe benefits tax (FBT) exemption 2014-15 to 2018-19 ($ million)

2014-15 2015-16 2016-17 2017-18 2018-19 Total

Tax discount for unincorporated small businesses

0 0 -550 -600 -650 -1,800

Immediate deductibility for small business start-up expenses

- - -10 -10 -10 -30

Extension of the FBT exemption -

- * * * *

* A small but unquantifiable cost to revenue.

Source: Explanatory Memorandum, Tax Laws Amendment (Small Business Measures No. 3) Bill 2015, pp. 7-9, accessed 5 August 2015.

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.46

The Parliamentary Joint Committee on Human Rights considers that the Bill does not raise human rights concerns.47

Key issues and provisions Schedule 1—Tax discount for unincorporated small businesses Item 1 of Schedule 1 of the Bill will amend the ITAA 1997 to insert proposed Subdivision 328-F—Small business income tax offset. This subdivision provides a tax offset to an individual who carries on an unincorporated small business entity or an individual whose assessable income includes a share of the net income of an unincorporated small business entity such as a partnership.

The term ‘small business entity’ is defined in section 328-110 of the ITAA 1997 and basically is an entity which carries on a business whose aggregated annual turnover is less than $2 million for an income year.48

The term ‘corporate tax entity’ is defined in section 960-115 of the ITAA 1997 and includes entities that are companies, corporate limited partnerships, corporate unit trusts and public trading trusts.49

Proposed subsections 328-360(1) and (2) of proposed Subdivision 328-F will provide that the amount of the tax offset is five per cent of the income tax payable on the portion of an individual’s income that is small business income. The maximum amount of the tax offset available to an individual in an income year will be capped at $1,000.

Item 6 of Schedule 1 provides that the amendments to be made by this Schedule will apply to assessments for the 2015-16 income year and later income years.

46. The Statement of Compatibility with Human Rights can be found at pages 31, 49 and 59 of the Explanatory Memorandum to the Bill. 47. Parliamentary Joint Committee on Human Rights, Twenty-fifth report of the 44th Parliament, The Senate, Canberra, 11 August 2015, p. 1, accessed 12 August 2015. 48. Income Tax Assessment Act 1997, op. cit., section 328-110, accessed 2 August 2015. 49. Ibid., section 960-115, accessed 2 August 2015.

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Schedule 2— Immediate deductibility for small business start-up expenses Currently, section 40-880 of the ITAA 1997 allows an entity to deduct over a five-year period capital expenditure it incurs for the purposes of a business that the entity carries on, or a business proposed to be carried on or that used to be carried on.

Such deductions are only available if the business was previously or proposed to be carried on for a taxable purpose and the expenditure relates to the business of the entity deriving assessable income from the business. In addition, the expenditure must not fall into one of the categories of expenditure described as excluded expenditure under subsection 40-880(5) of the ITAA 1997.

As mentioned above, the Treasurer announced in the 2015-16 Budget that from the 2015-16 income year, businesses would be able to immediately deduct a range of expenses associated with starting a new business, including professional, accounting and legal advice, that can presently be deducted over a five-year period.50

Items 2 and 3 of Schedule 2 will give effect to this proposal for immediate deductibility of capital expenditure to a small business entity in relation to a business that is proposed to be carried on and is incurred in:

• obtaining advice or services relating to the proposed structure, or proposed operation of the business or

• payment to an Australian government agency of fees, taxes or charges relating to establishing the business or its operating structure.

Item 5 of Schedule 2 states that the amendments apply to expenditure incurred in the 2015-16 income year and later income years.

Schedule 3—FBT and portable electronic devices Currently, a portable electronic device is not exempt from FBT if, earlier in the same FBT year, the employer has provided the employee, by way of an expense payment or property benefit, with an item that has substantially identical functions.

Item 2 of Schedule 3 will repeal existing subsection 58X(4) of the FBTAA 1986 and substitute proposed subsection 58X(4) to remove this limitation with respect to portable electronic devices provided by small business employers to their employees.51 Small business employers will be allowed an FBT exemption for multiple portable electronic devices provided to the same employee in the same FBT year, notwithstanding that those devices have substantially identical functions.

Item 4 of Schedule 3 provides that the amendments made by this Schedule apply in relation to the 2016-17 FBT year and later FBT years.

50. Australian Government, Budget measures: budget paper no. 2: 2015-16, op. cit., p. 17, accessed 6 August 2015. 51. Fringe Benefits Tax Assessment Act 1986, op. cit., subsection 58X(4), accessed 2 August 2015.

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