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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
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
ATO Australian Taxation Office
ITAA 1997 Income Tax Assessment Act 1997
1
General outline and financial impact
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.
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Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) Bill 2018
• 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.
4
Chapter 1
Extending accelerated depreciation for
small business entities
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.
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Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) Bill 2018
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).
6
Extending accelerated depreciation for small business entities
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 Small business entities can claim an
immediate deduction for depreciating immediate deduction for depreciating
assets that cost less than $20,000, assets that cost less than $20,000,
provided the asset is first acquired at provided the asset is first acquired at
or after 7.30 pm, by legal time in the or after 7.30 pm, by legal time in the
Australian Capital Territory, on Australian Capital Territory, on
12 May 2015, and first used or 12 May 2015, and first used or
installed ready for use on or before installed ready for use on or before
30 June 2019. Depreciating assets 30 June 2018. Depreciating assets
that do not meet these timing that do not meet these timing
requirements continue to be subject to requirements continue to be subject to
the $1,000 threshold. the $1,000 threshold.
Small business entities can claim an Small business entities can claim an
immediate deduction for depreciating immediate deduction for depreciating
assets that cost less than $1,000 if the assets that cost less than $1,000 if the
asset is first used or installed ready asset is first used or installed ready
for use on or after 1 July 2019. 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 Small business entities can claim a
deduction for an amount included in deduction for an amount included in
the second element of the cost of the second element of the cost of
depreciating assets that are first used depreciating assets that are first used
or installed ready for use in a or installed ready for use in a
previous income year. The total previous income year. The total
amount of the cost must be less than amount of the cost must be less than
$20,000 and the cost must be incurred $20,000 and the cost must be incurred
at or after 7.30 pm, by legal time in at or after 7.30 pm, by legal time in
the Australian Capital Territory, on the Australian Capital Territory, on
12 May 2015, and on or before 12 May 2015, and on or before
30 June 2019. Costs that are incurred 30 June 2018. Costs that are incurred
outside of these times continue to be outside of these times continue to be
subject to the $1,000 threshold. subject to the $1,000 threshold.
Small business entities can claim a Small business entities can claim a
deduction for an amount included in deduction for an amount included in
the second element of the cost of the second element of the cost of
depreciating assets that are first used depreciating assets that are first used
or installed ready for use in a or installed ready for use in a
previous income year, where the previous income year, where the
amount is less than $1,000, and the amount is less than $1,000, and the
cost is incurred on or after cost is incurred on or after
1 July 2019. 1 July 2018.
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Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) Bill 2018
New law Current law
Extension of deduction for low pool values
From 7.30 pm, by legal time in the From 7.30 pm, by legal time in the
Australian Capital Territory, on Australian Capital Territory, on
12 May 2015, assets that cost $20,000 12 May 2015, assets that cost $20,000
or more, and costs of $20,000 or or more, and costs of $20,000 or
more relating to depreciating assets more relating to depreciating assets
can be allocated to a small business can be allocated to a small business
entity's general small business pool entity's general small business pool
and deducted at a specified rate for and deducted at a specified rate for
the depletion of the pool. the depletion of the pool.
Assets and costs allocated to a Assets and costs allocated to a
general small business pool are general small business pool are
deducted at a rate of 15 per cent in deducted at a rate of 15 per cent in the
the year they are allocated, and a rate year they are allocated, and a rate of
of 30 per cent in subsequent income 30 per cent in subsequent income
years. years.
If the balance of a small business If the balance of a small business
entity's general small business pool is entity's general small business pool is
less than $20,000 at the end of an less than $20,000 at the end of an
income year, the small business entity income year, the small business entity
can claim a deduction for the entire can claim a deduction for the entire
balance of the pool. The income year balance of the pool. The income year
must end on or after 12 May 2015, must end on or after 12 May 2015,
and on or before 30 June 2019. and on or before 30 June 2018.
If the balance of a small business If the balance of a small business
entity's general small business pool is entity's general small business pool
less than $1,000 at the end of an is less than $1,000 at the end of an
income year that ends after income year that ends after
30 June 2019, the small business 30 June 2018, the small business
entity can claim a deduction for the entity can claim a deduction for the
entire balance of the pool. entire balance of the pool.
Deferral of five year 'lock-out' rule
The increased threshold that applies The increased threshold that applies
between 12 May 2015 and between 12 May 2015 and
30 June 2019 applies to all small 30 June 2018 applies to all small
business entities, including those business entities, including those
subject to the five year lock-out rule subject to the five year lock-out rule
in that period because the small in that period because the small
business previously opted out of the business previously opted out of the
small business entity capital small business entity capital
allowance provisions. allowance provisions.
For the purposes of applying the For the purposes of applying the
lock-out rule to an income year after lock-out rule to an income year after
30 June 2019, only the choice made 30 June 2018, only the choice made
in the last income year ending on or in the last income year ending on or
before 30 June 2019 is relevant. before 30 June 2018 is relevant.
8
Extending accelerated depreciation for small business entities
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,
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Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) Bill 2018
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]
10
Extending accelerated depreciation for small business entities
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].
11
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.
13
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.
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Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) Bill 2018
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.
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.
16
Regulation impact statement
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.
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Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) Bill 2018
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
18
Regulation impact statement
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
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Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) Bill 2018
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
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.
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Regulation impact statement
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)
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Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) Bill 2018
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 $2.2 million:
Table 3.1: Regulatory burden estimate (RBE) table (Option 2)
Average annual regulatory costs (from business as usual)
Change in Business Community Individuals Total change
costs organisations in cost
($ million)
Total, by -2.2* n/a n/a -2.2
sector
*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.
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Regulation impact statement
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 $0.2 million:
Table 3.2: Regulatory burden estimate (RBE) table (Option 3)
Average annual regulatory costs (from business as usual)
Change in Business Community Individuals Total change
costs organisations in cost
($ million)
Total, by -0.2* n/a n/a -0.2
sector
*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.
23
Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) Bill 2018
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.
24