Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
Thursday, 1 September 2016
2016
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TREASURY LAWS AMENDMENT (ENTERPRISE TAX PLAN) BILL 2016
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 Reducing the corporate tax rate .................................... 9
Chapter 2 Increase to the tax discount for unincorporated
small businesses .........................................................35
Chapter 3 Increase to the small business entity threshold ............41
Chapter 4 Regulation impact statement ........................................47
Index......................................................................................................61
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
ATO Australian Taxation Office
CGT Capital gains tax
FBT Fringe benefits tax
GDP Gross domestic product
GST Goods and services tax
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
OECD Organisation for Economic Co-operation and
Development
PAYG Pay-As-You-Go
PDF Pooled Development Fund
Rates Act Income Tax Rates Act 1986
RSA Retirement Savings Account
1
General outline and financial impact
Reducing the corporate tax rate
Schedule 1 to this Bill amends 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 are small business entities -- that is, corporate
tax entities that carry on a business and have an aggregated turnover of
less than $10 million. This lower corporate tax rate will progressively be
extended to all corporate tax entities by the 2023-24 income year. The
corporate tax rate will then be cut 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.
Schedules 4 and 5 to this Bill make consequential amendments to the
Income Tax Assessment Act 1936 and the Income Tax Assessment
Act 1997 to reflect the reduction in the corporate tax rate.
Date of effect: The corporate tax rate will be reduced from the
2016-17 income year.
Proposal announced: The proposal was announced on 3 May 2016 as
part of the 2016-17 Budget.
Financial impact: These amendments have the following revenue
implications:
2015-16 2016-17 2017-18 2018-19 2019-20
0 -$400m -$500m -$800m -$950m
Human rights implications: These Schedules do not raise any human
rights issues. See Statement of Compatibility with Human Rights --
Chapter 1, paragraphs 1.95 to 1.99.
Compliance cost impact: Nil.
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
Summary of regulation impact statement
Regulation impact on business
Impact: As this measure is changing rates that are currently part of the
tax system, it is not expected to generate any regulatory costs.
Main points:
• A more competitive corporate tax rate will encourage
investment, enhance productivity, increase the level of
economic activity and over time increase real wages and
living standards.
• The additional investment that will flow into Australia will
increase national income by building a larger capital stock
and by generating technology and knowledge spillovers that
would boost the productivity of Australian businesses.
• A lower corporate tax rate will also reduce incentives for
foreign multinationals to shift profits out of Australia.
• As the corporate tax cut is changing rates that are currently
part of the tax system, it is not expected to generate any
regulatory costs.
Increase to the tax discount for unincorporated small
businesses
Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to
increase the small business income tax offset to 16 per cent of net small
business income by the 2026-27 income year.
In the 2025-26 income year and earlier income years, a lower rate of
offset will apply:
• For the 2016-17 to 2023-24 income years, the offset is
8 per cent of net small business income.
• For the 2024-25 income year, the offset is 10 per cent of net
small business income.
• For the 2025-26 income year, the offset is 13 per cent of net
small business income.
4
General Outline and Financial Impact
Date of effect: The first increase to the offset will commence on
1 July 2016 and apply from the 2016-17 income year.
Proposal announced: The proposal was announced on 3 May 2016 as
part of the 2016-17 Budget.
Financial impact: These amendments have the following revenue
implications:
2015-16 2016-17 2017-18 2018-19 2019-20
0 0 -$150m -$150m -$150m
Human rights implications: This Schedule does not raise any human
rights issues. See Statement of Compatibility with Human Rights --
Chapter 2, paragraphs 2.18 to 2.22.
Compliance cost impact: Minimal.
Summary of regulation impact statement
Regulation impact on business
Impact: This measure results in a minimal increase to the regulatory
burden imposed upon smaller businesses. However, the discount ensures
there is a minimal distortion between the choice of entity type that small
businesses could operate their business through.
Main points:
• Reducing the corporate tax rate does not provide a tax cut for
those businesses that are not operated through a company.
Approximately 70 per cent of small businesses are
unincorporated. This means that 2.3 million businesses
would not receive any benefit from a corporate tax cut.
• The 2015-16 Budget introduced a 5 per cent unincorporated
tax discount for small businesses to provide them with a tax
cut at the same time as small business companies. This
further increase in the unincorporated tax discount for small
businesses is consistent with the original design parameters
and mirrors the company tax cut for small business.
• An expanded tax discount for unincorporated small
businesses will provide increased cash flow to profitable
unincorporated businesses. Unincorporated small business
5
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
owners will have higher after-tax earnings which they will be
free to reinvest in their businesses.
• There is a minimal increase in regulatory costs caused by the
tax discount calculation. This is because taxpayers will need
to be aware of and familiar with the changes, but this is
expected to be relatively straight forward and potentially part
of the routine update processes.
Increase to the small business entity threshold
Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 to
increase the aggregated turnover threshold for access to small business tax
concessions to $10 million. The aggregated turnover threshold for access
to the small business income tax offset will be limited to $5 million, and
the current aggregated turnover threshold of $2 million will be retained
for the small business capital gains tax concessions.
Date of effect: The new thresholds apply from the 2016-17 income year.
For the fringe benefits tax exemption for car-parking, the new threshold
applies from the FBT year commencing on 1 April 2017.
Proposal announced: The proposal was announced on 3 May 2016 as
part of the 2016-17 Budget.
Financial impact: These amendments have the following revenue
implications:
2015-16 2016-17 2017-18 2018-19 2019-20
-$0.0m -$280m -$700m -$550m -$650m
Human rights implications: This Schedule does not raise any human
rights issues. See Statement of Compatibility with Human Rights --
Chapter 3, paragraphs 3.26 to 3.29.
Compliance cost impact: Medium.
Summary of regulation impact statement
Regulation impact on business
Impact: This measure is expected to reduce the regulatory cost on smaller
businesses by $32 million per year.
6
General Outline and Financial Impact
Main points:
• Increasing the small business threshold to $10 million will
allow an additional 90,000 to 100,000 businesses to access
the benefits of the small business concessions, decreasing the
compliance costs (such as for record keeping and calculation
requirements) and increasing cash flow.
• This will enable greater reinvestment in small businesses and
provide the opportunity for these businesses to increase
employment and increase wages. It will also provide
incentives for small businesses at or near the existing
$2 million turnover threshold to grow, as they would
currently lose these concessions once they pass the threshold.
• Taxpayers will need to be aware of and familiarise
themselves with the new changes. This is expected to be
relatively straight forward and potentially part of the routine
update processes.
• The measure is expected to result in a medium overall
compliance cost impact, comprising a low implementation
impact and a medium decrease in ongoing compliance costs.
7
Chapter 1
Reducing the corporate tax rate
Outline of chapter
1.1 Schedule 1 to this Bill amends the Income Tax Rates Act 1986
(Rates Act) to reduce the corporate tax rate to 27.5 per cent for the
2016-17 income year for corporate tax entities that are small business
entities -- that is, corporate tax entities that carry on a business and have
an aggregated turnover of less than $10 million. This lower corporate tax
rate will progressively be extended to all corporate tax entities by the
2023-24 income year. The corporate tax rate will then be cut 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.
1.2 Schedules 4 and 5 to this Bill make consequential amendments
to the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax
Assessment Act 1997 (ITAA 1997) to reflect the reduction in the corporate
tax rate.
Context of amendments
1.3 Australia's strong economic performance over 25 years has
come in the face of large global economic shocks and ongoing instability,
as well as a range of domestic challenges. At the same time, extraordinary
technological change and increasing global connectivity have created new
opportunities and transformed how we live, work and do business.
1.4 The tax system needs to adapt to these challenges so that it
continues to support Australia's growth into the future. In addition, the tax
system needs to be fair and sustainable. Tax reform is crucial to
Australia's economic success and will help underpin the longevity of the
system.
1.5 To encourage new investment and be successful as a nation,
Australia needs a competitive business environment supported by sound
and well-targeted regulatory frameworks.
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Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
1.6 An uncompetitive business environment can be the difference
between firms investing in Australia or choosing to invest elsewhere.
1.7 At 30 per cent, Australia's headline corporate tax rate is now
one of the highest in the world and significantly above the average for
Organisation for Economic Co-operation and Development (OECD)
countries and those in the Asian region. Only five advanced countries
have higher corporate tax rates than Australia.
1.8 In the 2016-17 income year, the corporate tax rate will be
reduced to 27.5 per cent for small business entities with a turnover of less
than $10 million. This will deliver a lower tax rate for around 870,000
companies who employ over 3.4 million workers.
1.9 Over the following 10 years, the corporate tax rate will be
reduced incrementally so that, by the 2026-27 income year, the corporate
tax rate for all companies will be 25 per cent. This will encourage
investment and higher paid jobs. It will also make Australian companies
more internationally competitive in a tough global market place.
1.10 The reduction in the corporate tax rate will result in higher living
standards for Australians and an expected permanent increase in the size
of the economy of just over one per cent in the long term.
Summary of new law
1.11 Schedule 1 to this Bill amends the Rates Act to reduce the
corporate tax rate to 27.5 per cent for the 2016-17 income year for
corporate tax entities that are small business entities -- that is, corporate
tax entities that carry on a business and have an aggregated turnover of
less than $10 million.
1.12 This lower corporate tax rate will progressively be extended to
all corporate tax entities by the 2023-24 income year.
1.13 To achieve this, from the 2017-18 income year, the 27.5 per cent
corporate tax will apply to a base rate entity. A corporate tax entity will be
a base rate entity if it carries on a business and, for the 2017-18 income
year, has an aggregated turnover of less than $25 million. The aggregated
turnover threshold which applies to determine whether a corporate tax
entity is a base rate entity that qualifies for the lower corporate tax rate
will be raised annually, as outlined in Table 1.1.
10
Chapter 1: Reducing the corporate tax rate
Table 1.1: Annual aggregated turnover threshold to qualify for the
27.5 per cent corporate tax rate
Income year Annual aggregated turnover
threshold
2017-18 $25 million
2018-19 $50 million
2019-20 $100 million
2020-21 $250 million
2021-22 $500 million
2022-23 $1 billion
1.14 In the 2023-24 income year, the aggregated turnover threshold
test to qualify for the lower corporate tax rate will be removed. Therefore,
in that income year, the corporate tax rate will be 27.5 per cent for all
corporate tax entities.
1.15 The corporate tax rate will then be further reduced in stages
from 2024-25 income year, as outlined Table 1.2.
Table 1.2: Staged reduction in the corporate tax rate from 2024-25
Income year Corporate tax rate
2024-25 27 per cent
2025-26 26 per cent
2026-27 and later income years 25 per cent
1.16 Schedules 4 and 5 to this Bill make consequential amendments
to the ITAA 1936 and the ITAA 1997 to reflect the reduction in the
corporate tax rate.
Comparison of key features of new law and current law
New law Current law
For the 2016-17 income year, the The corporate tax rate for corporate
corporate tax rate for corporate tax tax entities that have an aggregated
entities that are small business turnover of less than $2 million is
entities will be 27.5 per cent. A 28.5 per cent.
corporate tax entity will be a small The corporate tax rate for corporate
business entity if it carries on a tax entities that have an aggregated
business and has an aggregated turnover of $2 million or more is
turnover of less than $10 million. 30 per cent.
11
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
New law Current law
The 27.5 per cent corporate tax rate
will progressively be extended to all
corporate tax entities by the
2023-24 income year. To achieve
this, from the 2017-18 income year,
the 27.5 per cent corporate tax will
apply to a base rate entity.
A corporate tax entity will be a base
rate entity if it carries on a business
and, for the 2017-18 income year, has
an aggregated turnover of less than
$25 million.
The aggregated turnover threshold
which applies to determine whether a
corporate tax entity is a base rate
entity that qualifies for the lower
corporate tax rate will then be raised
annually to:
• $50 million for the 2018-19
income year;
• $100 million for the 2019-20
income year;
• $250 million for the 2020-21
income year;
• $500 million for the 2021-22
income year; and
• $1 billion for the 2022-23 income
year.
In the period from the 2016-17
income year until the 2022-23 income
year, the corporate tax rate for
companies that have an aggregated
turnover which is equal to or exceeds
the threshold for an income year will
remain at 30 per cent.
In the 2023-24 income year, the
aggregated turnover threshold test to
qualify for the lower corporate tax
rate will be removed. Therefore, the
corporate tax rate will then be
27.5 per cent for all corporate tax
entities.
12
Chapter 1: Reducing the corporate tax rate
New law Current law
The corporate tax rate will then be cut
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 for later income
years.
The maximum franking credit that The maximum franking credit that
can be allocated to a frankable can be allocated to a frankable
distribution paid by a corporate tax distribution is based on the headline
entity will be based on a tax rate of corporate tax rate of 30 per cent for
27.5 per cent. all corporate tax entities.
However, if the entity's aggregated
turnover for the prior income year is
equal to or exceeds the aggregated
turnover threshold for the current
income year, then the maximum
franking credit that can be allocated
to a frankable distribution paid by the
entity will be based on the headline
corporate tax rate of 30 per cent.
Detailed explanation of new law
1.17 Schedule 1 to this Bill amends the Rates Act to reduce the
corporate tax rate to 27.5 per cent for the 2016-17 income year for
corporate tax entities that are small business entities -- that is, corporate
tax entities that carry on a business and have an aggregated turnover of
less than $10 million. This lower corporate tax rate will progressively be
extended to all corporate tax entities by the 2023-24 income year.
1.18 The corporate tax rate will then be cut 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 for later income
years.
13
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
1.19 Schedules 4 and 5 to this Bill make consequential amendments
to the ITAA 1936 and the ITAA 1997 to reflect the reduction in the
corporate tax rate.
Corporate tax rate reduced to 27.5 per cent for small business entities for
the 2016-17 income year
Ordinary corporate tax entities
1.20 Part 1 of Schedule 1 to this Bill amends the Rates Act to reduce
the corporate tax rate for corporate tax entities that are small business
entities to 27.5 per cent for the 2016-17 income year. [Schedule 1, item 1,
paragraph 23(2)(a) of the Rates Act]
1.21 A corporate tax entity is a small business entity if it carries on a
business and has an aggregated turnover of less than $10 million (see
Schedule 3 to this Bill).
Companies that are retirement savings account (RSA) providers
1.22 The taxable income of companies (other than life insurance
companies) that are RSA providers is divided into two components:
• the RSA component -- which is taxed at a 15 per cent rate;
and
• the standard component -- which is currently taxed at a
30 per cent rate.
1.23 The standard component of taxable income of companies (other
than life insurance companies) that are RSA providers will be taxed at a
rate of:
• if the company is a small business entity for the 2016-17
income year -- 27.5 per cent; or
• otherwise -- 30 per cent.
[Schedule 1, item 2, paragraph 23(3)(b) of the Rates Act]
Companies that become pooled development funds (PDFs) during the
2016-17 income year
1.24 The taxable income of companies that become PDFs during an
income year is divided into three components:
14
Chapter 1: Reducing the corporate tax rate
• the SME income component -- which is taxed at a 15 per
cent rate;
• the unregulated investment component -- which is taxed at a
25 per cent rate; and
• the amount that exceeds the PDF component -- which is
currently taxed at a 30 per cent rate.
1.25 For companies that become PDFs in the 2016-17 income year,
the amount that exceeds the PDF component will be taxed at a rate of:
• if the company is a small business entity for the 2016-17
income year -- 27.5 per cent; or
• otherwise -- 30 per cent.
[Schedule 1, item 3, paragraph 23(4)(c) of the Rates Act]
Non-profit companies
1.26 Non-profit companies pay no tax on the first $416 of their
taxable income. Tax is then shaded in at a rate of 55 per cent of the excess
over $416 until the tax on taxable income equals the corporate tax rate.
Where the taxable income exceeds the shade-in limit, the full taxable
income is effectively taxed at the corporate tax rate.
1.27 Currently, the shade-in limit is:
• for non-profit companies that are small business entities --
$863 (reflecting the current 28.5 per cent corporate tax rate
that applies to companies that are small business entities); or
• for all other non-profit companies -- $915 (reflecting the
current 30 per cent corporate tax rate that applies to those
companies).
1.28 As the corporate tax rate for companies that are small business
entities is being reduced to 27.5 per cent, the shade-in limit for non-profit
companies that are small business entities is reduced to $832 for the
2016-17 income year. [Schedule 1, item 4, subparagraph 23(6)(b)(i) of the
Rates Act]
1.29 Therefore, for the 2016-17 income year, the rates of tax payable
by a non-profit company that is a small business entity will be as follows:
• first $416 of taxable income -- nil;
15
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
• taxable income between $416 and $832 -- 55 per cent; and
• taxable income above $832 -- 27.5 per cent.
Recognised medium credit unions
1.30 Credit unions fall into three categories for income tax purposes:
• recognised small credit unions;
• recognised medium credit unions; and
• recognised large credit unions.
1.31 A credit union is a recognised small credit union if, broadly, its
notional taxable income is less than $50,000. Recognised small credit
unions are exempt from tax on interest derived from loans to members.
Other taxable income derived by a recognised small credit union is taxed
at the corporate tax rate.
1.32 A credit union is a recognised medium credit union if, broadly,
its notional taxable income is between $50,000 and $150,000.
A recognised medium credit union is subject to an effective tax rate based
on a sliding scale, according to its level of taxable income.
1.33 Currently, the tax payable by a recognised medium credit union
(before any offsets or credits) is limited to:
• for recognised medium credit unions that are small business
entities -- 42.75 per cent of the amount by which the credit
union's taxable income exceeds $49,999 (reflecting the
current 28.5 per cent corporate tax rate that applies to
companies that are small business entities); or
• for all other recognised medium credit unions -- 45 per cent
of the amount by which the credit union's taxable income
exceeds $49,999 (reflecting the current 30 per cent corporate
tax rate that applies to those companies).
1.34 A credit union is a recognised large credit union if, broadly, its
notional taxable income is $150,000 or more. The taxable income derived
by a recognised large credit union is taxed at the corporate tax rate.
1.35 As the corporate tax rate for companies that are small business
entities is being reduced to 27.5 per cent, the rate of tax on taxable income
exceeding $49,999 for recognised medium credit unions that are small
16
Chapter 1: Reducing the corporate tax rate
business entities is reduced to 41.25 per cent for the 2016-17 income year.
[Schedule 1, item 5, paragraph 23(7)(a) of the Rates Act]
Life insurance companies
1.36 The taxable income of life insurance companies is divided into
two classes:
• the ordinary class -- which is taxed at a 30 per cent rate; and
• the complying superannuation class -- which is taxed at a
15 per cent rate.
1.37 A substantial part of the ordinary class of taxable income of a
life insurance company represents investment income relating to ordinary
life insurance policyholders. Therefore, the lower corporate tax rate that
applies to companies that are small business entities will not apply to the
ordinary class of taxable income of life insurance companies.
1.38 The rate of tax paid by life insurance companies on the ordinary
component of the company's taxable income will be reduced to
27.5 per cent in the 2023-24 income year (when the corporate tax rate is
aligned for all companies). Consistent with other companies, the rate will
then be cut 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 subsequent
income years.
Public trading trusts
1.39 Public trading trusts are taxed as corporate tax entities.
Therefore, for public trading trusts that are small business entities, the
corporate tax rate for the 2016-17 income year will be 27.5 per cent.
[Schedule 1, item 6, paragraph 25(a) of the Rates Act]
Extension of the 27.5 per cent corporate tax rate to all corporate tax
entities by the 2023-24 income year
1.40 Parts 2 to 8 of Schedule 1 to this Bill amend the Rates Act to
extend the lower 27.5 per cent corporate tax rate to all corporate tax
entities by the 2023-24 income year.
17
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
2017-18 income year -- 27.5 per cent corporate tax rate applies to base
rate entities
1.41 To achieve this, from the 2017-18 income year, the 27.5 per cent
corporate tax (and the lower thresholds that apply to non-profit companies
and recognised medium credit unions) will apply to a base rate entity
(rather than a small business entity). [Schedule 1, items 8 to 12 and 14,
paragraph 23(2)(a), subparagraphs 23(2)(b)(i), 23(4)(c)(i) and 23(6)(b)(i),
paragraphs 23(7)(a) and 25(a) of the Rates Act]
1.42 A corporate tax entity will be a base rate entity for the
2017-18 income year if it:
• carries on a business (as defined in the ITAA 1997) in the
income year; and
• has an aggregated turnover (as defined in the ITAA 1997) of
an amount, worked out at the end of the income year, that is
less than $25 million.
[Schedule 1, items 7 and 13, definition of 'base rate entity' in subsection 3(1) and
section 23AA of the Rates Act]
1.43 The term business is defined in subsection 995-1(1) of the
ITAA 1997 to include any profession, trade, employment, vocation or
calling, but does not include occupation as an employee.
1.44 The term aggregated turnover is defined in subsection 995-1(1)
of the ITAA 1997 to have the meaning given by section 328-115. That
section defines an entity's aggregated turnover for an income year to
mean, broadly, the annual turnover of certain amounts for the income year
of the entity and of any entity that is a connected entity or an affiliate of
the entity.
1.45 Under the new tax system for managed investment trusts, the
trustee of an attribution managed investment trust is liable to pay tax on
amounts attributed to a foreign resident member in some circumstances
(section 276-105 of the ITAA 1997). The rate of tax that applies in these
circumstances is specified in section 28A of the Rates Act. If the foreign
resident member is a company, the rate of tax payable by the trustee is
equal to the corporate tax rate. Therefore, from the 2017-18 income year,
the lower 27.5 per cent corporate tax rate will apply to the trustee if the
foreign resident member is a company that is a base rate entity (rather
than a small business entity). [Schedule 1, item 15, paragraph 28A(a) of the
Rates Act]
18
Chapter 1: Reducing the corporate tax rate
2018-19 to 2022-23 income years -- Aggregated turnover threshold to
qualify as a base rate entity increased annually
1.46 For income years from the 2018-19 income year until the
2022-23 income year, the aggregated turnover threshold which applies to
determine whether a corporate tax entity is a base rate entity that qualifies
for the lower corporate tax rate (and the lower thresholds that apply to
non-profit companies and recognised medium credit unions) will be raised
annually, as outlined in Table 1.3.
Table 1.3: Annual aggregated turnover to qualify as a base rate entity
from the 2018-19 income year until the 2022-23 income year
Income year Annual aggregated turnover
threshold
2018-19 $50 million
2019-20 $100 million
2020-21 $250 million
2021-22 $500 million
2022-23 $1 billion
[Schedule 1, items 16 to 20, paragraph 23AA(b) of the Rates Act]
2023-24 income year -- 27.5 per cent rate applies to all corporate tax
entities
1.47 In the 2023-24 income year, the corporate tax rate will be
27.5 per cent for all corporate tax entities. The 27.5 per cent rate will
apply to:
• the taxable income of ordinary corporate tax entities;
• the standard component of taxable income of companies
(other than life insurance companies) that are RSA providers;
• the amount that exceeds the PDF component of taxable
income of companies that become PDFs during an income
year;
• the ordinary class of taxable income of life insurance
companies; and
• the taxable income of public trading trusts.
[Schedule 1, items 23 to 25, 29 and 30, subsection 23(2), paragraphs 23(3)(b), 23(4)(c)
and 23A(a) and section 25 of the Rates Act]
19
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
1.48 For non-profit companies, the shade-in limit will be $832 for all
companies for the 2023-24 income year. [Schedule 1, item 26,
paragraph 23(6)(b) of the Rates Act]
1.49 Therefore, for the 2023-24 income year, the rates of tax payable
by a non-profit company will be as follows:
• first $416 of taxable income -- nil;
• taxable income between $416 and $832 -- 55 per cent; and
• taxable income above $832 -- 27.5 per cent.
1.50 For all recognised medium credit unions, the rate of tax on
taxable income exceeding $49,999 will be 41.25 per cent for the
2023-24 income year. [Schedule 1, item 27, subsection 23(7) of the Rates Act]
1.51 As a consequence of all corporate tax entities being taxed at the
same rate, the definition of base rate entity will be removed. [Schedule 1,
items 21 and 28]
1.52 In some cases, the trustee of a trust is liable to tax on an amount
to which a non-resident beneficiary is entitled (subsection 98(3) of the
ITAA 1936). Under the new tax system for managed investment trusts,
the trustee of an attribution managed investment trust is liable to tax in
similar circumstances (section 276-105 of the ITAA 1997). In both cases,
if the non-resident beneficiary is a corporate tax entity, tax is imposed on
the trustee at the corporate tax rate (paragraphs 28(a) and 28A(a) of the
Rates Act). Paragraphs 28(a) and 28A(a) are being amended to reflect the
fact that, for the 2023-24 income year, all corporate tax entities will be
taxed at the same rate. [Schedule 1, items 31 and 32, paragraphs 28(a) and 28A of
the Rates Act]
1.53 Under the new tax system for managed investment trusts, the
trustee of a managed investment trust is liable to pay tax on non-arm's
length income (section 276-105 of the ITAA 1997). The rate of tax that is
payable is the headline corporate tax rate of 30 per cent (section 12(10) of
the Rates Act). As the headline corporate tax rate is being reduced to
27.5 per cent, the rate of tax that the trustee of a managed investment trust
is be liable to pay on non-arm's length income will also be reduced to
27.5 per cent in the 2023-24 income year. [Schedule 1, item 22,
subsection 12(10) of the Rates Act]
20
Chapter 1: Reducing the corporate tax rate
Corporate tax rate reduced to 27 per cent for the 2024-25 income year
1.54 Part 9 of Schedule 1 to this Bill amends the Rates Act to reduce
the corporate tax rate for corporate tax entities to 27 per cent for the
2024-25 income year. The 27 per cent rate will apply to:
• the taxable income of ordinary corporate tax entities;
• the standard component of taxable income of companies
(other than life insurance companies) that are RSA providers;
• the amount that exceeds the PDF component of taxable
income of companies that become PDFs during an income
year;
• the ordinary class of taxable income of life insurance
companies;
• the taxable income of public trading trusts; and
• the non-arm's length income of managed investment trusts.
[Schedule 1, items 33 to 36, 39 and 40, subsections 12(10) and 23(2),
paragraphs 23(3)(b), 23(4)(c) and 23A(a) and section 25 of the Rates Act]
1.55 For non-profit companies, the shade-in limit will be $817 for the
2024-25 income year. [Schedule 1, item 37, paragraph 23(6)(b) of the Rates Act]
1.56 Therefore, for the 2024-25 income year, the rates of tax payable
by a non-profit company will be as follows:
• first $416 of taxable income -- nil;
• taxable income between $416 and $817 -- 55 per cent; and
• taxable income above $817 -- 27 per cent.
1.57 For all recognised medium credit unions, the rate of tax on
taxable income exceeding $49,999 will be 40.5 per cent for the
2024-25 income year. [Schedule 1, item 38, subsection 23(7) of the Rates Act]
Corporate tax rate reduced to 26 per cent for the 2025-26 income year
1.58 Part 10 of Schedule 1 to this Bill amends the Rates Act to reduce
the corporate tax rate for corporate tax entities to 26 per cent for the
2025-26 income year. The 26 per cent rate will apply to:
21
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
• the taxable income of ordinary corporate tax entities;
• the standard component of taxable income of companies
(other than life insurance companies) that are RSA providers;
• the amount that exceeds the PDF component of taxable
income of companies that become PDFs during an income
year;
• the ordinary class of taxable income of life insurance
companies;
• the taxable income of public trading trusts; and
• the non-arm's length income of managed investment trusts.
[Schedule 1, items 41 to 44, 47 and 48, subsections 12(10) and 23(2),
paragraphs 23(3)(b), 23(4)(c) and 23A(a) and section 25 of the Rates Act]
1.59 For non-profit companies, the shade-in limit will be $788 for the
2025-26 income year. [Schedule 1, item 45, paragraph 23(6)(b) of the Rates Act]
1.60 Therefore, for the 2024-25 income year, the rates of tax payable
by a non-profit company will be as follows:
• first $416 of taxable income -- nil;
• taxable income between $416 and $788 -- 55 per cent; and
• taxable income above $788 -- 26 per cent.
1.61 For all recognised medium credit unions, the rate of tax on
taxable income exceeding $49,999 will be 39 per cent for the
2025-26 income year. [Schedule 1, item 44, subsection 23(7) of the Rates Act]
Corporate tax rate reduced to 25 per cent for the 2026-27 income year
and for later income years
1.62 Part 11 of Schedule 1 to this Bill amends the Rates Act to reduce
the corporate tax rate for corporate tax entities to 25 per cent for the
2026-27 income year and for later income years. The 25 per cent rate will
apply to:
• the taxable income of ordinary corporate tax entities;
• the standard component of taxable income of companies
(other than life insurance companies) that are RSA providers;
22
Chapter 1: Reducing the corporate tax rate
• the amount that exceeds the PDF component of taxable
income of companies that become PDFs during an income
year;
• the ordinary class of taxable income of life insurance
companies;
• the taxable income of public trading trusts; and
• the non-arm's length income of managed investment trusts.
[Schedule 1, items 49 to52, 55and56, subsections 12(10) and 23(2), paragraphs 23(3)(b),
23(4)(c) and 23A(a) and section 25 of the Rates Act]
1.63 For non-profit companies, the shade-in limit will be $762 for the
2026-27 income year and for subsequent income years. [Schedule 1, item 53,
paragraph 23(6)(b) of the Rates Act]
1.64 Therefore, for the 2026-27 income year and for subsequent
income years, the rates of tax payable by a non-profit company will be as
follows:
• first $416 of taxable income -- nil;
• taxable income between $416 and $762 -- 55 per cent; and
• taxable income above $762 -- 25 per cent.
1.65 For all recognised medium credit unions, the rate of tax on
taxable income exceeding $49,999 will be 37.5 per cent for the
2026-27 income year and for subsequent income years. [Schedule 1, item 54,
subsection 23(7) of the Rates Act]
Consequential amendments
1.66 Schedules 4 and 5 to this Bill make consequential amendments
to the ITAA 1936 and the ITAA 1997 to reflect the reduction in the
corporate tax rate. In particular, these consequential amendments amend:
• provisions relating to the operation of the imputation system;
• provisions relating to the tax offset available to life insurance
policyholders;
• provisions relating to the operation of the carry forward tax
offset rules; and
23
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
• examples which illustrate the operation of various provisions
in the income tax law.
Operation of the imputation system
Amendments that apply from the 2016-17 income year to
2022-23 income year
1.67 Under the company imputation system, when an Australian
corporate tax entity distributes profits to its members, the entity has the
option of passing to those members credit for income tax paid by the
entity on the profits. This is done by franking the distribution.
1.68 The amount of franking credits that can be attached to a
distribution cannot exceed the maximum franking credit for the
distribution (section 202-60 of the ITAA 1997). The maximum franking
credit is worked out by reference to the corporate tax gross-up rate,
which is defined in subsection 995-1(1) by reference to the standard
corporate tax rate. The standard corporate tax rate is defined in
subsection 995-1(1) to mean the 30 per cent corporate tax rate (even if the
entity is a small business entity that is taxed at the 28.5 per cent corporate
tax rate).
1.69 In the period from the 2016-17 income year to 2022-23 income
year, many corporate tax entities will have a corporate tax rate of
27.5 per cent. Other entities will have a corporate tax rate of 30 per cent.
The corporate tax rate that applies to an entity in a particular income year
will depend on the entity's aggregated turnover in that income year.
1.70 During that period, a greater number of corporate tax entities
will be entitled to the 27.5 per cent corporate tax rate each year, reflecting
the increase in the aggregated turnover to qualify as a base rate entity.
Therefore, it is not feasible to continue to operate the imputation system at
the headline corporate tax rate of 30 per cent for all corporate tax entities.
1.71 Consequently, from the 2016-17 income year, the operation of
imputation system for corporate tax entities will be based on the
company's corporate tax rate for a particular income year, worked out
having regard to the entity's aggregated turnover for the previous income
year. This is necessary because corporate tax entities usually pay
distributions to members for an income year during that income year.
However, a corporate tax entity will not know its aggregated turnover for
a particular income year (and therefore its corporate tax rate for that
income year) until after the end of the income year.
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Chapter 1: Reducing the corporate tax rate
1.72 This change does not alter basic operation of the imputation
system. Distributions to members who are domestic shareholders will
continue to be ultimately taxed at the member's marginal tax rate.
1.73 As a result of this change, for the purposes of applying
provisions in the imputation system, corporate tax entities will use the
corporate tax rate for imputation purposes. This is generally defined to
mean the entity's corporate tax rate for the income year (the current
income year), worked out on the assumption that the entity's aggregated
turnover for the income year is equal to its aggregated turnover for the
previous income year. [Schedule 4, item 28, paragraph (a) of the definition of
'corporate tax rate for imputation purposes' in subsection 995-1(1) of the ITAA 1997]
Example 1.1
In the 2015-16 income year, Company A has an aggregated turnover of
$18 million. In the 2016-17 income year, its aggregated turnover
increased to $20 million.
Therefore, for the 2016-17 income year, Company A will have:
• a corporate tax rate of 30 per cent (having regard to its aggregated
turnover of $20 million in the 2016-17 income year);
• a corporate tax rate for imputation purposes of 30 per cent (based
on aggregated turnover of $18 million in the 2015-16 income year);
and
• a corporate tax gross-up rate of 2.33 -- that is,
(100% -- 30%)/30%.
As a result, if Company A makes a distribution of $100 in the
2016-17 income year, the maximum franking credit that can be
attached to the distribution is $42.86 -- that is, $100/2.33.
In the 2017-18 income year, Company A will work out its corporate
tax rate for imputation purposes based on its aggregated turnover for
the 2016-17 income year -- that is, $20 million. Therefore, for the
2017-18 income year, Company A will have:
• a corporate tax rate for imputation purposes of 27.5 per cent; and
• a corporate tax gross-up rate of 2.64 -- that is,
(100% -- 27.5%)/27.5%.
As a result, if Company A makes a distribution of $100 in the
2017-18 income year, the maximum franking credit that can be
attached to the distribution is $37.88 -- that is, $100/2.64.
25
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
1.74 If a corporate tax entity did not exist in the previous income
year, the entity's corporate tax rate for imputation purposes will be the
rate specified in paragraph 28(2)(a) of the Rates Act -- that is,
27.5 per cent. [Schedule 4, item 28, paragraph (b) of the definition of 'corporate tax
rate for imputation purposes' in subsection 995-1(1) of the ITAA 1997]
1.75 Numerous consequential amendments are made to provisions
relating to the operation of the imputation system to reflect the
introduction of a corporate tax rate for imputation purposes that varies
depending on a corporate tax entity's circumstances in an income year.
For example, amendments are made to:
• section 202-60 of the ITAA 1997, which applies to determine
the maximum franking credit on a distribution;
• section 203-50, which specifies the consequences for
breaching the benchmark rule; and
• the definition of corporate tax gross-up rate in
subsection 995-1(1), which operates for the purpose of
applying a range of other provisions in the imputation
system.
[Schedule 4, items 1 to 26, sections 36-55, 197-45, 197-60, 197-65, 200-25, 202-55,
202-60, 203-50, 215-20, 705-90, 707-310, 976-1, 976-10, 976-15 and the definition of
'corporate tax gross-up rate' in subsection 995-1(1) of the ITAA 1997]
1.76 In addition, consequential amendments are made to:
• modify the definition of corporate tax rate to reflect these
changes; and
• repeal the definition of standard corporate tax rate.
[Schedule 4, items 27 and 29, definition of 'corporate tax rate' in subsection 995-1(1) of
the ITAA 1997]
Amendments that apply in the 2023-24 income year and in subsequent
income years
1.77 In the 2023-24 income year, a corporate tax rate of 27.5 per cent
will apply to all corporate tax entities. As a consequence:
• numerous amendments will be made to the company
imputation system to reflect the single tax rate for all
companies; and
26
Chapter 1: Reducing the corporate tax rate
• the definition of corporate tax rate for imputation purposes
will be repealed.
[Schedule 4, items 30 to 57, sections 36-55, 197-45, 197-60, 197-65, 200-25, 202-55,
202-60, 203-50, 215-20, 705-90, 707-310, 976-1, 976-10, 976-15 and the definitions of
'corporate tax gross-up rate' and 'corporate tax rate' in subsection 995-1(1) of the
ITAA 1997]
Life insurance policyholders
1.78 If an ordinary life insurance policyholder receives the proceeds
of a life insurance policy because the policy matures, section 26AH of the
ITAA 1936 applies to include some or all of the proceeds in the
policyholder's assessable income in some circumstances. The amount that
is included in assessable income depends on how long the policy has been
held, generally as outlined in Table 1.4.
Table 1.4: Life insurance policy proceeds that are assessable
Period policy held by Amount of proceeds included in
policyholder policyholder's assessable income
8 years or less 100 per cent of the investment component
9 years Two-thirds of the investment component
10 years One-thirds of the investment component
More than 10 years Nil
1.79 If an amount is included in a policyholder's assessable income
under section 26AH of the ITAA 1936, the policyholder may be entitled
to a tax offset under section 160AAB. The tax offset applies to the
'eligible section 26AH amount'. The amount of the tax offset is calculated
by reference to the 'statutory percentage', which is based on the rate of tax
paid by the life insurance company on the ordinary component of the
company's taxable income.
1.80 The rate of tax paid by life insurance companies on the ordinary
component of the company's taxable income will be reduced to
27.5 per cent in the 2023-24 income year (when the corporate tax rate is
aligned for all companies). Consistent with other companies, the rate will
then be cut 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 subsequent
income years.
27
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
[Schedule 1, items 29, 39, 47and55, paragraph 23A(a) of the Rates Act]
1.81 When the rate of tax paid by life insurance companies on the
ordinary component of the company's taxable income has been reduced
on previous occasions, the tax offset available under section 160AAB has
also been reduced, but with a one year delay.
1.82 Therefore, consistent with this practice, the 'statutory
percentage' for working out the tax offset in relation to the 'eligible
section 26AH amount' of an ordinary life insurance policyholder will be
the rate specified in Table 1.5.
Table 1.5: Statutory percentage for life insurance policyholders
Income year Statutory percentage
2002-03 or a later income year 30 per cent
before 2024-25
2024-25 27.5 per cent
2025-26 27 per cent
2026-27 26 per cent
2027-28 and subsequent income years 25 per cent
[Schedule 5, item 9, definition of 'statutory percentage' in subsection 160AAB(1) of the
ITAA 1936]
Operation of the carry forward tax offset rules
1.83 Sections 65-30 and 65-35 of the ITAA 1997 relate to the
operation of the tax offset carry forward rules. Table 1.6 outlines
consequential amendments that are made in particular income years to
sections 65-30 and 65-35 to reflect the staged reduction in the corporate
tax rate.
Table 1.6: Amendments to sections 65-30 and 65-35
Income year The amendments modify sections 65-30 and 65-35 to:
2016-17 Reflect the reduction in the corporate tax rate from
28.5 per cent to 27.5 per cent for entities that are small
business entities.
2017-18 Reflect the extension of the 27.5 per cent rate to entities
that are base rate entities
2023-24 Reflect the alignment of the corporate tax rate at
27.5 per cent for all corporate tax entities
28
Chapter 1: Reducing the corporate tax rate
Income year The amendments modify sections 65-30 and 65-35 to:
2024-25 Reflect the reduction in the corporate tax rate from
27.5 per cent to 27 per cent
2025-26 Reflect the reduction in the corporate tax rate from
27 per cent to 26 per cent
2026-27 Reflect the reduction in the corporate tax rate from
26 per cent to 25 per cent
[Schedule 5, items 1, 2, 14, 15, 21, 22, 28, 29, 35 and 36, subsections 65-30(2)
and 65-35(3A) of the ITAA 1997]
Updating examples in the income tax law
1.84 A number of examples in the income tax law to illustrate the
operation of certain provisions reflect the current headline corporate tax
rate. In particular:
• subsection 36-17(5) of the ITAA 1997 contains an example
of the operation of section 36-17, which specifies how
corporate tax entities can deduct tax losses;
• subsections 36-55(1) and (2) of the ITAA 1997 contain
examples relating to the operation of section 36-55, which
specifies how excess franking offsets can be converted into
corporate tax losses in some circumstances; and
• subsection 115-280(3) of the ITAA 1997 contains an
example of the operation of the section 115-280, which
allows deductions for certain shareholders who receive
dividends from listed investment companies in some
circumstances.
1.85 Table 1.7 outlines consequential amendments that are made in
particular income years to update the examples in subsection 36-17(5),
36-55(1), 36-55(2) and 115-280(3) to reflect the staged reduction in the
corporate tax rate.
Table 1.7: Amendments to update examples in the income tax law
Income year The amendments modify each example to:
2017-18 Specify that the company in the example is not a base
rate entity
2023-24 Reflect the alignment of the corporate tax rate at
27.5 per cent for all corporate tax entities
2024-25 Reflect the reduction in the corporate tax rate from
27.5 per cent to 27 per cent
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Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
Income year The amendments modify each example to:
2025-26 Reflect the reduction in the corporate tax rate from
27 per cent to 26 per cent
2026-27 Reflect the reduction in the corporate tax rate from
26 per cent to 25 per cent
[Schedule 5, items 3 to 5, 8, 10 to 13, 16 to 20, 23 to 27, 30 to 34 and 37, examples in
subsections 36-17(5), 36-55(1), 36-55(2) and 115-280(3) of the ITAA 1997]
Application and transitional provisions
Reduction in the corporate tax rate to 27.5 per cent
1.86 Part 1 of Schedule 1 to this Bill amends the Rates Act to reduce
the corporate tax rate for corporate tax entities that are small business
entities to 27.5 per cent for the 2016-17 income year. These amendments,
and associated consequential amendments in Schedule 4, apply from the
2016-17 income year. [Schedule 1, subitem 57(1); Schedule 4, subitem 58(1)]
1.87 The amendments in Part 1 of Schedule 1, and associated
consequential amendments in Schedules 4 and 5, commence on
1 July 2016. [Subsection 2(1), table items 2, 21 and 24]
Extension of the 27.5 per cent corporate tax rate to all corporate tax
entities
1.88 Parts 2 to 8 of Schedule 1 to this Bill amend the Rates Act to
extend the lower 27.5 per cent corporate tax rate to all corporate tax
entities by the 2023-24 income year.
1.89 To achieve this, from the 2017-18 income year until the
2022-23 income year, the 27.5 per cent corporate tax will apply to a base
rate entity. The amendments in Parts 2 to 7 of Schedule 1 to this Bill raise
the aggregated turnover threshold which applies to determine whether a
corporate tax entity is a base rate entity that qualifies for the lower
27.5 per cent corporate tax rate annually.
1.90 These amendments, and associated consequential amendments,
commence and apply in six stages, as outlined in Table 1.8.
30
Chapter 1: Reducing the corporate tax rate
Table 1.8: Commencement and application of increases in aggregated
turnover to qualify for the 27.5 per cent corporate tax rate
The increase in commences on: and applies to:
aggregated turnover
to this amount:
$25 million 1 July 2017 the 2017-18 income year and
[Subsection 2(1), later income years.
table items 3 and 25] [Schedule 1, subitem 57(2)]
$50 million 1 July 2018 the 2018-19 income year and
[Subsection 2(1), later income years.
table item 4] [Schedule 1, subitem 57(3)]
$100 million 1 July 2019 the 2019-20 income year and
[Subsection 2(1), later income years.
table item 5] [Schedule 1, subitem 57(4)]
$250 million 1 July 2020 the 2020-21 income year and
[Subsection 2(1), later income years.
table item 6] [Schedule 1, subitem 57(5)]
$500 million 1 July 2021 the 2021-22 income year and
[Subsection 2(1), later income years.
table item 7] [Schedule 1, subitem 57(6)]
$1 billion 1 July 2022 the 2022-23 income year and
[Subsection 2(1), later income years.
table item 8] [Schedule 1, subitem 57(7)]
1.91 The amendments in Part 8 of Schedule 1 to this Bill extend the
27.5 per cent corporate tax rate to all corporate tax entities. These
amendments, and associated consequential amendments in Schedule 4,
apply from the 2023-24 income year. [Schedule 1, subitem 57(8); Schedule 4,
subitem 58(2)]
1.92 The amendments in Part 8 of Schedule 1, and associated
consequential amendments in Schedules 4 and 5, commence on
1 July 2023. [Subsection 2(1), table items 9, 22 and 26]
Reduction in the corporate tax rate to 25 per cent by the 2026-27 income
year
1.93 The amendments in Parts 9 to 11 of Schedule 1 to this Bill
reduce the corporate tax rate for all corporate tax entities in stages to
25 per cent by the 2026-27 income year.
1.94 These amendments, and associated consequential amendments,
commence and apply in three stages, as outlined in Table 1.9.
31
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
Table 1.9: Commencement and application of amendments to reduce
the corporate tax rate to 25 per cent in stages
The reduction in the commences on: and applies to:
corporate tax rate
to:
27 per cent 1 July 2024 the 2024-25 income year and
[Subsection 2(1), later income years.
table items 10 and 27] [Schedule 1, subitem 57(9)]
26 per cent 1 July 2025 the 2025-26 income year and
[Subsection 2(1), later income years.
table items 11 and 28] [Schedule 1, subitem 57(10)]
25 per cent 1 July 2026 the 2026-27 income year and
[Subsection 2(1), later income years.
table items 12 and 29] [Schedule 1, subitem 57(11)]
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011
Reduction in the corporate tax rate
1.95 Schedules 1, 4 and 5 are 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
1.96 Schedule 1 to this Bill amends 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 are small business entities -- that is,
corporate tax entities that carry on a business and have an aggregated
turnover of less than $10 million. This lower corporate tax rate will
progressively be extended to all corporate tax entities by the 2023-24
income year. The corporate tax rate will then be cut to
• 27 per cent for the 2024-25 income year;
• 26 per cent for the 2025-26 income year; and
32
Chapter 1: Reducing the corporate tax rate
• 25 per cent for the 2026-27 income year and subsequent
income years.
1.97 Schedules 4 and 5 to this Bill make consequential amendments
to the ITAA 1936 and the ITAA 1997 to reflect the reduction in the
corporate tax rate.
Human rights implications
1.98 These Schedules do not engage any of the applicable rights or
freedoms.
Conclusion
1.99 These Schedules are compatible with human rights as they do
not raise any human rights issues.
33
Chapter 2
Increase to the tax discount for
unincorporated small businesses
Outline of chapter
2.1 Schedule 2 to this Bill amends the Income Tax Assessment
Act 1997 (ITAA 1997) to increase the small business income tax offset to
16 per cent of an eligible individual's basic income tax liability that
relates to their total net small business income from the 2026-27 income
year.
2.2 In the 2025-26 income year and earlier income years, a lower
rate of offset will apply:
• For the 2016-17 to 2023-24 income years, the offset is
8 per cent of an eligible individual's basic income tax
liability that relates to their total net small business income.
• For the 2024-25 income year, the offset is 10 per cent of an
eligible individual's basic income tax liability that relates to
their total net small business income.
• For the 2025-26 income year, the offset is 13 per cent of an
eligible individual's basic income tax liability that relates to
their total net small business income.
2.3 All references in this chapter are to the ITAA 1997 unless
specified otherwise.
Context of amendments
2.4 The small business income tax offset was introduced by the
Government in the 2015-16 income year as part of a range of tax
measures to help small business in the 2015-16 Budget. It entitles
individuals who are small business entities, or who are 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 relates to
their total net small business income, capped at $1,000.
35
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
2.5 This offset provides unincorporated small businesses with a tax
discount 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 Given the further cuts to the company tax rate made by
Schedule 1 to this Bill, this Schedule further increases the tax discount
provided by the offset. This minimises tax distortions between the
different entity types through which small businesses may be run, and
ensures that the many small businesses run through unincorporated
entities also receive an increase in their cash flow.
Summary of new law
2.7 Schedule 2 to this Bill increases the small business income tax
offset to 16 per cent of an eligible individual's basic income tax liability
that relates to their total net small business income from the
2026-27 income year.
2.8 In the 2025-26 income year and earlier income years, a lower
rate of offset will apply:
• For the 2016-17 to 2023-24 income years, the offset is
8 per cent of an eligible individual's basic income tax
liability that relates to their total net small business income.
• For the 2024-25 income year, the offset is 10 per cent of an
eligible individual's basic income tax liability that relates to
their total net small business income.
• For the 2025-26 income year, the offset is 13 per cent of an
eligible individual's basic income tax liability that relates to
their total net small business income.
Comparison of key features of new law and current law
New law Current law
Individuals are entitled to a Individuals are entitled to a
non-refundable tax offset if they are non-refundable tax offset if they are
small business entity, or they have a small business entity, or they have a
share of a small business' net income share of a small business' net income
included in their assessable income, included in their assessable income,
provided the small business is not a provided the small business is not a
corporate tax entity. corporate tax entity.
36
Chapter 2: Increase to the tax discount for unincorporated small businesses
New law Current law
In the 2016-17 to 2023-24 income The small business income tax offset
years, the small business income tax is 5 per cent of an eligible
offset is 8 per cent of an eligible individual's basic income tax liability
individual's basic income tax liability that relates to their total net small
that relates to their total net small business income.
business income.
In the 2024-25 income year, the small
business income tax offset is 10 per
cent of an eligible individual's basic
income tax liability that relates to
their total net small business income.
In the 2025-26 income year, the small
business income tax offset is 13 per
cent of an eligible individual's basic
income tax liability that relates to
their total net small business income.
In the 2026-27 income year and later
income years, the small business
income tax offset is 16 per cent of an
eligible individual's basic income tax
liability that relates to their total net
small business income.
Detailed explanation of new law
2.9 Schedule 2 to this Bill increases the small business income tax
offset to 16 per cent of an eligible individual's basic income tax liability
that relates to their total net small business income from the
2026-27 income year. [Schedule 2, item 4, subsection 328-360(1)]
2.10 In the 2025-26 income year and earlier income years, a lower
rate of offset will apply:
• For the 2016-17 to 2023-24 income years, the offset is
8 per cent of an eligible individual's basic income tax
liability that relates to their total net small business income.
[Schedule 2, item 1, subsection 328-360(1)]
• For the 2024-25 income year, the offset is 10 per cent of an
eligible individual's basic income tax liability that relates to
their total net small business income. [Schedule 2, item 2,
subsection 328-360(1)]
37
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
• For the 2025-26 income year, the offset is 13 per cent of an
eligible individual's basic income tax liability that relates to
their total net small business income. [Schedule 2, item 3,
subsection 328-360(1)]
2.11 These amendments provide small businesses that do not pay the
corporate tax rate with a benefit that is broadly equivalent to the company
tax rate cuts.
2.12 The initial increase to 8 per cent will coincide with the reduction
of the corporate tax rate applying to small business entities in 2016-17 to
27.5 per cent. The corporate tax rate applying to small business entities
will stay the same until 2024-25, so no further increase in the rate of the
offset is required until that time.
2.13 In 2024-25, the rate of the offset will increase to 10 per cent to
coincide with the decrease to the corporate tax rate (which will, at that
stage, apply to all corporate tax entities including small business entities)
to 27 per cent. The rate of the offset and the corporate tax rate will then
continue to move together in this way until 2026-27, when they reach
their final position of a 16 per cent rate of offset and a 25 per cent
corporate tax rate.
2.14 The relationship between the changes in the discount rate and
the corporate tax rate applying to small businesses are summarised in the
following table:
Table 2.1: Relationship between the changes in the discount rate and
the corporate tax rate applying to small businesses
Income year/s Rate of small business Corporate tax rate
income tax offset applying to small
businesses
2015-16 5 per cent 28.5 per cent
2016-17 to 2023-24 8 per cent 27.5 per cent
2024-25 10 per cent 27 per cent*
2025-26 13 per cent 26 per cent*
2026-27 and later 16 per cent 25 per cent*
income years
* From 2024-25, the corporate tax rate will be the same for all corporate tax
entities.
2.15 Although these increases in the offset will increase the amount
of offset an eligible individual may claim, the offset will remain capped at
$1,000.
38
Chapter 2: Increase to the tax discount for unincorporated small businesses
2.16 Schedule 3 to this Bill contains amendments that will change the
aggregated turnover threshold for small businesses to $5 million for the
purpose of this offset.
Application provisions
2.17 The changes to the rate of the small business income tax offset
commence and apply in four stages, detailed in Table 2.2.
Table 2.2 - Commencement and application of increases to the rate of
the small business income tax offset
The increase to commences on ... and applies to ...
this rate ...
8 per cent 1 July 2016 the 2016-17 income year and
later income years (subject to
subsequent rate increases).
[Schedule 2, subitem 5(1)]
10 per cent 1 July 2024 the 2024-25 income year and
later income years (subject to
subsequent rate increases).
[Schedule 2, subitem 5(2)]
13 per cent 1 July 2025 the 2025-26 income year and
later income years (subject to
the subsequent rate increase).
[Schedule 2, subitem 5(3)]
16 per cent 1 July 2026 the 2026-27 income year and
later income years.
[Schedule 2, subitem 5(4)]
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011
Increase to the tax discount for unincorporated small businesses
2.18 This Schedule 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.
39
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
Overview
2.19 Schedule 2 to this Bill increases the small business income tax
offset to 16 per cent of an eligible individual's basic income tax liability
that relates to their total net small business income from the
2026-27 income year.
2.20 In the 2025-26 income year and earlier income years, a lower
rate of offset will apply:
• For the 2016-17 to 2023-24 income years, the offset is
8 per cent of an eligible individual's basic income tax
liability that relates to their total net small business income.
• For the 2024-25 income year, the offset is 10 per cent of an
eligible individual's basic income tax liability that relates to
their total net small business income.
• For the 2025-26 income year, the offset is 13 per cent of an
eligible individual's basic income tax liability that relates to
their total net small business income.
Human rights implications
2.21 This Schedule does not engage any of the applicable rights or
freedoms.
Conclusion
2.22 This Schedule is compatible with human rights as it does not
raise any human rights issues.
40
Chapter 3
Increase to the small business entity
threshold
Outline of chapter
3.1 Schedule 3 to this Bill amends the Income Tax Assessment
Act 1997 (ITAA 1997) to increase the aggregated turnover threshold for
access to most small business tax concessions to $10 million. The
aggregated turnover threshold for access to the small business income tax
offset will be increased to $5 million, and the current aggregated turnover
threshold of $2 million will be retained for the small business capital gains
tax (CGT) concessions.
3.2 All references in this chapter are to the ITAA 1997 unless
specified otherwise.
Context of amendments
3.3 Small businesses are eligible for a range of tax concessions to
reduce their tax liability and cost of compliance.
3.4 Entities can access these concessions if they are carrying on a
business and have aggregated turnover of less than $2 million. Additional
or alternative eligibility criteria may also apply for some concessions.
3.5 The current $2 million aggregated turnover test was introduced
in 2007, and captures the vast majority of Australian businesses.
3.6 Increasing the threshold would allow an additional 90,000 to
100,000 businesses access to the small business concessions, decreasing
their compliance costs and increasing cash flow. This would enable
greater reinvestment in small businesses and provide the opportunity for
these businesses to increase employment and increase wages. It would
also provide incentives for small businesses at or near the existing
$2 million turnover threshold to grow, as currently they would lose these
concessions once they pass the threshold.
3.7 The Board of Taxation recommended an increase to the
threshold in their 2014 Review of the Tax Impediments Facing Small
Business, stating that increasing the threshold would reduce the number of
41
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
businesses who are at or near the current threshold and so face uncertainty
as to their tax treatment. It would also assist businesses with a higher
aggregated turnover but low margins to access the concessions.
3.8 An increase to the threshold was also recommended in the
Australia's Future Tax System Review in 2009.
Summary of new law
3.9 Schedule 3 to this Bill allows small businesses with aggregated
turnover of less than $10 million to access most small business tax
concessions, and small businesses with aggregated turnover of less than
$5 million to access the small business income tax offset.
3.10 The current $2 million threshold is retained for access to the
small business CGT concessions.
Comparison of key features of new law and current law
New law Current law
Small business entities with Small business entities with
aggregated turnover of less than aggregated turnover of less than
$10 million can access following $2 million can access the small
small business tax concessions: business tax concessions.
• Immediate deductibility for small
business start-up expenses;
• Simpler depreciation rules;
• Simplified trading stock rules;
• Roll-over for restructures of small
businesses;
• Deductions for certain prepaid
business expenses immediately;
• Accounting for goods and
services tax (GST) on a cash
basis;
• Annual apportionment of input
tax credits for acquisitions and
importations that are partly
creditable;
• Paying GST by quarterly
instalments;
42
Chapter 3: Increase to the small business entity threshold
New law Current law
• Fringe benefits tax (FBT)
car-parking exemption; and
• Pay-As-You-Go (PAYG)
instalments based on gross
domestic product (GDP)-adjusted
notional tax.
Small business entities with
aggregated turnover less than
$5 million can also access the small
business income tax offset.
Small business entities with
aggregated turnover less than
$2 million can access the small
business CGT concessions.
Detailed explanation of new law
3.11 This Schedule amends the definition of 'small business entity' in
the ITAA 1997 to increase the aggregated turnover threshold for
eligibility as a small business entity from $2 million to $10 million.
[Schedule 3, items 15, 17 and 18, paragraphs 328-110(1)(b), 328-110(3)(b)
and 328-110(4)(b)]
3.12 This allows entities that carry on a business and have aggregated
turnover of less than $10 million to access most of the small business
concessions in the tax law.
Small business income tax offset
3.13 This Schedule amends Subdivision 328-F to create a different
aggregated turnover threshold of $5 million for the purposes of the small
business income tax offset. It achieves this by modifying the meaning of
'small business entity'.
3.14 For the purposes of Subdivision 328-F, and therefore the small
business income tax offset, an entity will work out whether they are a
small business entity for the income year as if each reference in section
328-110 (which imposes the aggregated turnover threshold) to $10 million
were a reference to $5 million. [Schedule 3, item 20, section 328-357]
3.15 Schedule 3 to this Bill contains amendments that change the rate
of the offset.
43
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
Small business CGT concessions
3.16 This Schedule amends Division 152 to retain the current
aggregated turnover threshold of $2 million for the purposes of the small
business CGT concessions contained in that Division. It achieves this by
replacing references to 'small business entity' with the new defined term
'CGT small business entity'.
3.17 An entity will be a CGT small business entity for an income
year if that entity is a small business entity for the income year, and would
still be a small business entity for the income year if each reference in
paragraph 328-110(1)(b) (which imposes the aggregated turnover
threshold) to $10 million were a reference to $2 million. [Schedule 3, items 2,
3, 5 to 7, 9, 12 and 13, subparagraphs 152-10(1)(c)(i) and (iii), subsection 152-10(1AA),
paragraphs 152 10(1A)(a), 152-10(1A)(d) and 152-10(1B)(b), subsection 152-48(1) and
section 152-100]
3.18 This change does not affect the operation of the small business
CGT concessions.
Example 3.1
Yvonne is a sole trader with an aggregated turnover under
Division 328 of $3 million.
As her aggregated turnover is less than $10 million, she is a small
business entity and can access the small business tax concessions for
which that is an eligibility requirement (such as the simplified trading
stock rules).
She is also a small business entity for the purposes of
Subdivision 328-F because her aggregated turnover is less than
$5 million. This means she can is eligible for the small business
income tax offset.
However, she is not a CGT small business entity because her
aggregated turnover is not less than $2 million. This means she is not
eligible for the small business CGT concessions in Division 152 unless
she meets an alternative eligibility criterion (such as the maximum net
asset value test).
44
Chapter 3: Increase to the small business entity threshold
Consequential amendments
3.19 The Schedule makes consequential amendments to guidance
material, headings and notes to clarify the application of the changed
small business entity thresholds. [Schedule 3, items 1, 4, 8, 10, 11, 14, 16 and 19,
section 152-5, paragraph 150-10(1)(c) (note), subsection 152-10(1A) (note 2),
subsection 152-10(1B)(note 1 and note 2), subsection 328-110(1) (note 1 and note 2),
subsection 328-110(3)(heading) and section 328-350]
3.20 The Schedule includes the definition of 'CGT small business
entity' in the dictionary in subsection 995-1(1). [Schedule 3, item 21,
subsection 995-1(1)]
Application provisions
3.21 The amendments to the aggregated turnover threshold apply
from the 2016-17 income year, subject to the following modifications.
[Schedule 3, subitem 22(1)]
3.22 Amendments relating to CGT apply to CGT events happening
on or after the start of the 2016-17 income year. [Schedule 3, subitem 22(2)]
3.23 To the extent that the amendments changing the $2 million
aggregated turnover threshold to $10 million relate to the operation of the
Fringe Benefits Tax Assessment Act 1986, they apply to the FBT year
starting on 1 April 2017 and to later FBT years. [Schedule 3, subitem 22(3)]
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011
Increase to the small business entity threshold
3.24 This Schedule 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.
45
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
Overview
3.25 Schedule 3 to this Bill amends the ITAA 1997 to increase the
aggregated turnover threshold for access to most small business tax
concessions to $10 million. The aggregated turnover threshold for access
to the small business income tax offset will be increased to $5 million, and
the current aggregated turnover threshold of $2 million will be retained
for the small business capital gains tax concessions.
Human rights implications
3.26 This Schedule does not engage any of the applicable rights or
freedoms.
Conclusion
3.27 This Schedule is compatible with human rights as it does not
raise any human rights issues.
46
Chapter 4
Regulation impact statement
1. The problem
4.1 Australia has experienced strong economic performance over
25 years, even though large global economic shocks and continuing
instability, as well as a range of domestic challenges. At the same time,
extraordinary technological change and increasing global connectivity
have created new opportunities and transformed how we live, work and do
business. The tax system affects incentives to work, save and invest, and
needs to adapt to these challenges so that it continues to support
Australia's growth into the future. In addition, the tax system needs to be
fair and sustainable. Tax reform is crucial to Australia's economic success
and will help underpin the longevity of the system.
4.2 The Government considered a number of tax options to establish
a tax system that supports greater investment, more jobs, higher wages,
and helps maintain and improve growth in standards of living and has
announced a number of changes as part of a tax reform package. This
impact statement considers the tax reform measures that reduce the tax
burden on businesses.
4.3 Corporate income tax is currently levied at a rate of 30 per cent
on all taxable income earned by companies with turnover of $2 million or
more. This means Australia's corporate tax rate is higher than many
countries we compete with for investment. Australia relies more heavily
on corporate income tax than most other countries. In 2013, Australia's
corporate taxation was 4.9 per cent of gross domestic product (GDP),
while the Organisation for Economic Co-operation and Development
(OECD) average was 2.9 per cent. A relatively heavy reliance on
corporate tax has been a consistent feature of our tax system over several
decades.
4.4 While the legal incidence of corporate tax falls on companies,
the economic burden of company tax is ultimately shared among its
shareholders, consumers and employees. Empirical studies show that, in
the long run, over half of the economic burden of corporate tax is likely to
be shifted away from shareholders through lower wages for employees
and higher prices for consumers. Individuals who rely on labour income
could be expected to be affected more significantly from lower wages
growth associated with higher company taxes.
47
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
4.5 Incorporated small businesses make an important contribution to
the Australian economy and along with unincorporated small businesses,
account for the vast majority of the active private businesses in the
country and represent large shares of its employment and value add.
4.6 96 per cent of all Australia's businesses are small businesses
(defined as having less than $2 million turnover) and approximately
70 per cent are unincorporated. There are currently over 3 million small
businesses in Australia. According to the Australian Bureau of Statistics,
small businesses provide around 44 per cent of non-financial private
sector jobs in Australia and around one third of non-financial output in
2013-14. Small businesses added around $340 billion to the Australian
economy in 2013-14. The small business sector has the potential to
contribute strongly to national growth and competitiveness, including
providing greater employment opportunities. Small businesses have the
advantage of being adaptable and flexible and the ability to respond
profitably to changing circumstances.
4.7 While small businesses play 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 larger companies. On
average, smaller businesses face disproportionately higher costs of
complying with their regulatory obligations, per unit of turnover
compared to larger businesses. This includes tax.
4.8 Currently, small businesses with turnover less than $2 million
have access to a number of small business concessions to reduce their
compliance costs and increase their cash flow, such as:
• lower corporate tax rate of 28.5 per cent and the 5 per cent
tax discount for unincorporated small business;
• simplified depreciation rules including immediate tax
deductibility for assets costing less than $20,000 until
30 June 2017;
• simplified trading stock rules, where businesses have the
option to avoid an end of year stocktake if the value of the
stock has changed by less than $5,000;
• a simplified method of calculating Pay-As-You-Go (PAYG)
instalments by the Australian Taxation Office (ATO), which
removes the risk of under or over estimating PAYG
instalments and penalties that may be applied;
48
Chapter 4: Regulation impact statement
• the option to account for goods and service tax (GST) on a
cash basis and pay GST instalments as calculated by the
ATO; and
• other minor concessions (e.g. Fringe Benefits Tax exemption
for car parking).
4.9 Currently, 2.3 million unincorporated small business owners are
eligible for the unincorporated small business tax discount.
2. Case for government action / Objective of reform
4.10 A broad range of theoretical and empirical academic studies
support the benefits of lowering tax rates on businesses. These benefits
were discussed in the Re:Think tax discussion paper, released by the
Government on 30 March 2015. The discussion paper noted that while
company tax is paid by companies, the burden of taxation is passed on to
shareholders, consumers and employees and that lower business taxes
would encourage higher levels of investment in Australia and benefit all
Australians through increased employment and wages in the long run.
These benefits have also been highlighted by recent public tax reviews in
the United Kingdom, New Zealand and Ireland.
4.11 A study of the efficiency and incidence of major Australian
taxes, including company tax, was released by the Treasury as Working
Paper 2015-01 in April 2015. The paper confirmed that the benefits of
lower business taxes discussed in Re:Think were still apparent when
analysis was applied to the Australian tax system and tax rates, using a
model based on the Australian economy.
4.12 As part of the 2016-17 Budget, Treasury modelled the
economy-wide impact of cutting the company tax rate from 30 per cent to
25 per cent (Treasury Working Paper 2016-02). This analysis was
supplemented by independent modelling from two external organisations.
These studies concluded that cutting the company tax rate to 25 per cent
would raise the level of GDP and deliver significant gains to Australian
workers. To realise the benefits associated with lower business taxes, the
Government adopted a policy aim of reducing the tax rates faced by
businesses from their present levels. The lower tax rates must be paid for
within a fiscal envelope that is consistent with the Government's fiscal
strategy.
49
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
4.13 In addition, small businesses are typically more vulnerable to
shocks and changes in economic conditions than larger businesses. This
makes it particularly important to ensure that policy settings support small
business growth and innovation in the near term. Further, Government
regulation is the source of high compliance costs for small business.
Reducing compliance costs for small business will allow the owners of
these businesses additional time to focus on their business while the
economy is in transition.
3. Policy options
Option 1: No policy change
4.14 Under this option, no new actions would be taken by the
Government and existing policy settings would be relied upon.
Option 2: Business tax rate changes
4.15 Given the current lower tax rate for small businesses, a reduction
in the company tax rate could be implemented by reducing the higher
headline rate, the small business rate, or changing the turnover threshold
to which the rate applies.
4.16 Changing the headline company tax rate has a high direct cost to
revenue, because a high proportion of company tax is paid by businesses
with turnover above the small business turnover threshold. The high direct
costs of changing the headline rate are partly offset in the long-run by the
improvements to incomes generated by the economic benefits of the
reform. Reducing the small business tax rate has more limited impacts,
reflecting the smaller number of companies affected and that these
companies are economically smaller.
4.17 It is also possible to vary the design of general rate reductions by
changing the dates of commencement for the various elements. All of
these variables were considered in the design of this option.
4.18 The first element of this option would reduce the small business
tax rate to 27.5 per cent in 2016-17. The turnover threshold to qualify for
the lower tax rate would be raised from $2 million to $10 million in
2016-17, $25 million in 2017-18, $50 million in 2018-19, $100 million in
2019-20, $250 million in 2020-21, $500 million in 2021-22, $1 billion in
2022-23 and removed entirely in 2023-24. The corporate tax rate for all
companies would then be progressively cut to 27 per cent in 2024-25 and
50
Chapter 4: Regulation impact statement
by one percentage point in each subsequent year until the corporate tax
rate reaches 25 per cent in 2026-27.
4.19 The rate at which franking credits can be distributed will
mechanically change as a consequence of changing tax rates. Currently,
businesses facing the small company tax rate can apply franking credits at
a rate consistent with the higher company tax rate (30 per cent). Under
this option, the maximum rate for the distribution of franking credits will
be based on the rate of tax paid by the company making the distribution,
discontinuing the current treatment.
4.20 Reducing company tax rates does not provide a tax cut for those
businesses that are not operated through a company. Approximately
70 per cent of small businesses are unincorporated. This means that
2.3 million businesses would not receive any benefit from a company tax
cut. It is difficult to provide a tax cut for all businesses because of the
differing tax treatment of each entity type. Companies are taxed at a
consistent flat rate, whereas income earned by an unincorporated entity is
taxed at its owner's marginal personal income tax rate. Finding a tax cut
for companies and unincorporated businesses that is equivalent for every
scenario is impossible without creating a large compliance burden.
However, the 2015-16 Budget introduced a 5 per cent unincorporated tax
discount for small businesses to provide them with a tax cut at the same
time as small business companies.
4.21 The second element of this option would increase the tax
discount for unincorporated small businesses with annual turnover less
than $5 million incrementally from 5 per cent from 1 July 2016 until it
reaches 16 per cent on 1 July 2026 (as the company tax rate reduces). The
tax discount would increase by 3 percentage points in 2016-17 to
8 per cent, remain constant at 8 per cent for eight years, then increase to
10 per cent in 2024-25, 13 per cent in 2025-26, and reach a new
permanent discount of 16 per cent in 2026-27. The tax discount would
continue to be capped at $1,000 per individual per year. This further
increase in the unincorporated tax discount is consistent with the original
design parameters and attempts to mirror the company tax cut for small
business.
Option 3: Increasing the small business turnover threshold
4.22 This proposal would see an increase in the small business entity
turnover threshold for access to the small business concessions from
$2 million per annum to $10 million per annum from 1 July 2016.
4.23 Currently, small businesses with turnover less than $2 million
have access to a number of small business concessions such as those listed
51
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
in section 1. Increasing this threshold would allow a larger number of
businesses to access the benefits of the small business concessions. This
would also provide incentives for small businesses at or near the existing
$2 million turnover threshold to grow, as currently they would lose these
concessions once they pass the threshold. The turnover threshold could be
moved to any value above $2 million and would produce some
deregulatory benefits because of the deregulatory nature of the
concessions that are attached to the threshold.
4.24 A figure of $5 million for access to the small business
concessions was recommended in both the Australia's Future Tax System
(Henry) Report from 2009 and the Board of Taxation's Tax Impediments
facing Small Business Report.
4.25 The $2 million threshold was established in 2007 and has not
been adjusted since then to reflect changes in wages, incomes and costs of
running a business. Enterprises may have lost access to small business
concessions over time as a result of these changes. A higher threshold for
the majority of concessions available as part of the small business entity
definition is thought more appropriate as fewer businesses will face a
barrier to growth presented by the small business threshold. Increasing the
threshold to $5 million will allow an additional 60,000 to 70,000
businesses access to the concessions while increasing the threshold to
$10 million will allow an additional 90,000 to 100,000 businesses access.
4.26 To reduce the cost to Government revenue the current $2 million
turnover threshold could be retained for access to the small business
capital gains tax concessions and access to the unincorporated small
business tax discount could be limited to entities with turnover less than
$5 million, as proposed in Option 2.
4.27 Ultimately, the $10 million threshold ($2 million turnover
threshold for small business capital gains tax (CGT) concessions and
$5 million turnover threshold for access to the unincorporated small
business tax discount) was identified as delivering the best combination of
support for small business, reductions to small business compliance costs
and the cost to revenue in tight fiscal circumstances.
4. Cost benefit analysis of each option / Impact analysis
Option 1: No policy change
4.28 This option involves no new actions by the Government and
relies on existing policy settings. Consequently, it would introduce no new
impacts on businesses, community organisations or individuals. At the
same time, it would not address the issues identified in Section 1:
The Problem.
52
Chapter 4: Regulation impact statement
Option 2: Business tax rate changes
Benefits
4.29 Currently, the corporate tax rate is 28.5 per cent for companies
with turnover less than $2 million and 30 per cent for all other companies.
4.30 Lowering the company tax rate will have economic benefits.
These benefits were discussed in the Re:Think tax discussion paper. As
part of the 2016-17 Budget, Treasury modelled the economic impact of a
company tax cut, and found that cutting the company tax rate from
30 per cent to 25 per cent would raise the level of GDP in the long-term.
4.31 The results of this modelling exercise were released publicly,
alongside related modelling results from two independent consultancies.
These studies found that changes to company taxation affect the economy
primarily through a change in business investment.
4.32 The Treasury analysis found that a change to company taxation
made more investments viable to investors, who require returns equal to
the rate set on global markets. Higher investment, sourced from foreign
investors, raises the amount of capital in the economy. With more capital
available, the productivity of Australian workers rises, driving an increase
in real wages. Overall, the majority of the increase in incomes generated
by a cut to company tax accrues to domestic workers.
4.33 An expanded tax discount for unincorporated business income
would provide increased cash flow to profitable unincorporated
businesses. Unincorporated small business owners will have higher after
tax earnings which they will be free to reinvest in their businesses.
4.34 Unincorporated small businesses will use the tax discount in the
way that they deem to be most valuable. With the extra cash flow from the
tax discount, a small business could increase paid worker hours, invest in
business assets or increase personal consumption. We are not able to
assess what each small business will do with the tax discount, but it can
reasonably be assumed that, in aggregate, the benefit will flow to each of
these pathways in some proportion.
4.35 Both the lower company tax rate and the unincorporated tax
discount may lead to an increase in consumption for small business
owners, which is a good thing in itself. It increases the reward for many
hard-working small business owners. Beyond this, re-investment in the
business will have a long term pay off for the owners and potentially any
employees. Employing more (increasing paid working hours) or
purchasing new assets is the equivalent of deferred consumption for future
increased benefit. This effect has not been quantified.
53
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
4.36 Unincorporated businesses with turnover of less than $5 million
and companies with turnover of less than $10 million will benefit from a
$5.3 billion cash flow improvement over the forward estimates under this
option and option 3, combined.
Costs
4.37 As the corporate tax cut option is changing rates that are
currently part of the tax system, this is not expected to generate regulatory
costs.
4.38 The cap on the unincorporated small business tax discount will
limit the cost to revenue to $1,000 per individual per year. The cap also
reduces the proportional magnitude of the tax cut for those with higher
business incomes. This will retain an incentive for business owners who
are considering incorporating when their business earnings have grown.
4.39 There is a minimal increase in the regulatory costs caused by the
tax discount calculation. This is because taxpayers will need to be aware
of and familiar with the changes, but this is expected to be relatively
straightforward and potentially part of the routine update processes.
4.40 The expected fiscal impact of this option over the forward
estimates is a reduction in revenue of $5.3 billion. This includes the cost
of raising the small business turnover threshold (option 3).
Net Benefit
4.41 A more competitive corporate tax rate will encourage
investment, enhance productivity, increase the level of economic activity
and over time increase real wages and living standards. The additional
investment that will flow into Australia will increase national income by
building a larger capital stock and by generating technology and
knowledge spillovers that would boost the productivity of Australian
businesses.
4.42 A lower company income tax rate will also reduce incentives for
foreign multinationals to shift profits out of Australia.
4.43 The Treasury analysis and independent modelling found that
cutting the company tax rate to 25 per cent would raise the level of GDP
and deliver significant gains to Australian workers. The studies released
with the 2016-17 Budget also estimated the net benefit of lower company
tax rates by modelling the outcomes generated by alternative assumptions
to offset the fiscal impact (personal income tax increases,
non-distortionary tax increases, and changes in government spending). All
of these studies found that substantial net benefits accrue under each of
54
Chapter 4: Regulation impact statement
the three alternative offset assumptions. The Treasury analysis for the
2016-17 Budget also found the results were not sensitive to alternative
specifications for key parameters in the model.
4.44 Changes to tax rates do not increase the regulatory burden
beyond what is already imposed by the existing tax system.
4.45 The unincorporated tax discount results in a minimal increase to
the regulatory burden imposed upon smaller businesses. However, this
discount ensures that there is minimal distortion between the choice of
entity type that small businesses could operate their business through. A
corporate tax cut alone would leave around 70 per cent of small
businesses with no benefit. By looking at both components of this option
together, we see an increase in cash flow for businesses, offset by the
same amount of reduction in Government revenues. However, the
increase to economic growth as a result of the company tax cuts provides
a clear rationale for selecting this option.
Table 4.1: Regulatory burden and cost offset estimate table for
option 2
Average annual regulatory costs (from business as usual)
Change in costs Business Community Individuals Total
($ million) organisations change in
costs
Total, by sector .. $0 $0 ..
Key: .. not nil but rounded to nil
Cost offset Business Community Individuals Total, by
($ million) organisations source
Agency
Are all new costs offset?
Yes, costs are offset No, costs are not offset
Deregulatory--no offsets required
Total (Change in costs - Cost offset) ($ million) = $0
55
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
Option 3: Increasing the small business turnover threshold to $10 million
Benefits
4.46 Increasing the threshold to $10 million will allow an additional
90,000 to 100,000 businesses to access the benefits of the small business
concessions, decreasing the compliance costs (such as for record keeping
and calculation requirements) and increasing cash flow. This will enable
greater reinvestment in small businesses and provide the opportunity for
these businesses to increase employment and increase wages. It also
provides incentives for small businesses at or near the existing $2 million
turnover threshold to grow, as currently they would lose these concessions
once they pass the threshold.
4.47 This option would reduce the regulatory cost on smaller
businesses by $32 million per year.
4.48 As more businesses become eligible for the lower tax rate, the
broader economic benefits discussed in option 2 will become more
widespread. The benefits of this option are included in the revenue
implications outlined in option 2. Small businesses are expected to
experience a $2.2 billion cash flow benefit over the forward estimates
from the increase in the threshold. However, it should be noted that the
benefit to smaller businesses is the same as the cost to Government
revenue.
Costs
4.49 Taxpayers will need to be aware of and familiarise themselves
with the new changes. This is expected to be relatively straightforward
and potentially part of the well-established update process.
4.50 This option is expected to result in a medium overall compliance
cost impact, comprising a low implementation impact and a medium
decrease in ongoing compliance costs.
4.51 It is expected to have an impact on revenue of approximately
$2.2 billion over the forward estimates. The benefits to small business
through higher cash flows are equally offset by the cost to Government
revenue.
Table 4.2: Financial implications ($ millions):
2015-16 2016-17 2017-18 2018-19 2019-20 Total
Australian - -300 -700 -550 -650 -2,200
Taxation Office
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Chapter 4: Regulation impact statement
5. Consultation plan
4.52 As part of the Government's release of the Tax Discussion
Paper, extensive consultation was undertaken on potential elements of
reform. This process involved a number of key stakeholder engagements
through face to face meetings, as well as an open submission process. In
total, over 800 formal submissions were received, many which are
available online. The Government and/or Treasury conducted more than
130 meetings with stakeholders throughout Australia.
4.53 The Government's consideration of tax proposals have also been
informed by targeted and confidential consultation with tax specialists
outside Government, including the Board of Taxation.
4.54 The Treasury also consulted extensively with the ATO in order
to identify any implementation issues, integrity concerns with the
proposals, or any potential flow-on impacts they might have within the
broader tax framework.
Stakeholder submissions
4.55 Submissions were provided by the following types of
organisations:
• large and small businesses (e.g. Qantas, BHP, Westpac);
• professional services firms (e.g. KPMG, Deloitte);
• peak bodies and industry groups (e.g. Business Council of
Australia, Council of Small Business Australia, Property
Council of Australia);
• trade unions (e.g. Australian Council of Trade Unions,
Australian Services Union);
• social welfare groups and religious organisations; and
• private individuals.
4.56 Submissions generally considered a number of tax topics, with a
broad range of views being presented on each. The number of submissions
mentioning particular tax topics is summarised in Chart 1.
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Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
Chart 1: Number of submissions per tax topic
Feedback obtained from consultations
4.57 From submissions and broader consultation, a number of key
trends in stakeholder sentiment were identified in respect of particular
policy areas. Those of relevance to this Regulation Impact Statement are
summarised in the table below.
Topic Stakeholder views
Changes to the Company tax was mentioned in 145 submissions.
company tax Submissions from large businesses and associated peak
rate groups generally argued that the company tax rate should be
lowered as this would make Australia more competitive
internationally as an investment destination. There was a level
of consensus among this group that the company tax rate
should be reduced to 25 per cent. One social welfare group
argued that higher tax rates should be imposed on the banking
and mining industries.
Some peak bodies also argued that the company tax rate and
the top marginal personal tax rate should be harmonised.
Changes to Small business was mentioned in 66 submissions.
small business Many submissions from both peak groups representing
rules businesses and private individuals argued that the threshold for
access to small business tax concessions should be more
generous (for example, that they should be available to
businesses with turnover up to $5 million, as mentioned in the
Australia's Future Tax System report). Some argued that the
rate of company tax that applies to small businesses should be
reduced below its current rate of 28.5 per cent.
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Chapter 4: Regulation impact statement
6. Option selection / Conclusion
4.58 Acknowledging the overall benefits associated with lowering
company tax rates from their present level, the preferred policy
incorporates lower tax rates and increases in the threshold for the lower
company tax rate currently available to small businesses, along with an
increase in the rate and scope of the tax discount for unincorporated small
businesses. It is also proposed to increase the threshold to allow a larger
number of small businesses to access the small business concessions other
than the lower corporate tax rate.
4.59 Under the preferred option the small business tax rate will be cut
to 27.5 per cent in 2016-17.
4.60 The turnover threshold to qualify for the lower tax rate will be
raised from $2 million to $10 million in 2016-17, $25 million in 2017-18,
$50 million in 2018-19, $100 million in 2019-20, $250 million in
2020-21, $500 million in 2021-22, $1 billion in 2022-23 and removed
entirely in 2023-24.
4.61 The corporate tax rate for all companies will then be
progressively cut to 27 per cent in 2024-25 and by one percentage point in
each subsequent year until the corporate tax rate reaches 25 per cent in
2026-27. The maximum rate for the distribution of franking credits will be
based on the rate of tax paid by the company making the distribution.
4.62 The tax discount for unincorporated small businesses with
annual turnover less than $5 million will be increased incrementally from
5 per cent from 1 July 2016 until it reaches 16 per cent on 1 July 2026 (as
the company tax rate reduces). The tax discount will increase by
3 percentage points in 2016-17 to 8 per cent, remain constant at 8 per cent
for eight years, then increase to 10 per cent in 2024-25, 13 per cent in
2025-26, and reach a new permanent discount of 16 per cent in 2026-27.
The tax discount will continue to be capped at $1,000 per individual
per year.
4.63 The Government opted to increase the small business entity
turnover threshold for access to the small business concessions from
$2 million to $10 million per annum from 1 July 2016. The $10 million
threshold was chosen over the $5 million threshold to minimise
impediments to growth. By increasing the threshold to $10 million,
around 30,000 additional businesses will gain access to the small business
concessions than if the threshold was increased to $5 million. The
economic benefits from potentially increased employment, higher wages,
removing disincentives to business growth and reduced compliance costs
were considered to outweigh the cost of foregone revenue.
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Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
4.64 The current $2 million turnover threshold will be retained for
access to the small business CGT concessions. As the Government's
intention in increasing the threshold is to minimise impediments to
growth, expanding access to the CGT concessions would not further this
aim. The concessions are aimed at small businesses at the end of their life
with the purpose of helping small business owners to save for their
retirement. Businesses with turnover greater than $2 million are likely to
have greater capacity to save for their retirement. Access to the
unincorporated small business tax discount will be limited to entities with
turnover less than $5 million, as entities with turnover over $5 million
generally find it to their advantage to incorporate.
4.65 This is a Regulation Impact Statement for final assessment as
there have not been any earlier decision-making points and there will be
no further decision-making points in relation to these matters.
7. Implementation and evaluation / Review
4.66 Legislation is required to implement the proposals. The design
of the legislation is expected to be relatively straightforward largely
relying on current models in the tax system.
4.67 The ATO would be responsible for administering the tax rules
applying to small businesses. The ATO is experienced in implementing
this type of reform.
4.68 Evaluation of this proposal would be ongoing. It is expected that
the ATO's normal compliance and data analysis activities would identify
tax avoidance activities occurring as a result of this proposal.
60
Index
Schedule 1: Reducing the corporate tax rate
Bill reference Paragraph number
Item 1, paragraph 23(2)(a) of the Rates Act 1.20
Item 2, paragraph 23(3)(b) of the Rates Act 1.23
Item 3, paragraph 23(4)(c) of the Rates Act 1.25
Item 4, subparagraph 23(6)(b)(i) of the Rates Act 1.28
Item 5, paragraph 23(7)(a) of the Rates Act 1.35
Item 6, paragraph 25(a) of the Rates Act 1.39
Items 7 and 13, definition of 'base rate entity' in subsection 3(1) and 1.42
section 23AA of the Rates Act
Items 8 to 12 and 14, paragraph 23(2)(a), subparagraphs 23(2)(b)(i), 1.41
23(4)(c)(i) and 23(6)(b)(i), paragraphs 23(7)(a) and 25(a) of the
Rates Act
Item 15, paragraph 28A(a) of the Rates Act 1.45
Items 16 to 20, paragraph 23AA(b) of the Rates Act Table 1.3
Items 21 and 28 1.51
Item 22, subsection 12(10) of the Rates Act 1.53
Items 23 to 25, 29 and 30, subsection 23(2), paragraphs 23(3)(b), 1.47
23(4)(c) and 23A(a) and section 25 of the Rates Act
Item 26, paragraph 23(6)(b) of the Rates Act 1.48
Item 27, subsection 23(7) of the Rates Act 1.50
Items 29, 39, 47and55, paragraph 23A(a) of the Rates Act 1.80
Items 31 and 32, paragraphs 28(a) and 28A of the Rates Act 1.52
Items 33 to 36, 39 and 40, subsections 12(10) and 23(2), 1.54
paragraphs 23(3)(b), 23(4)(c) and 23A(a) and section 25 of the Rates
Act
Item 37, paragraph 23(6)(b) of the Rates Act 1.55
Item 38, subsection 23(7) of the Rates Act 1.57
Items 41 to 44, 47 and 48, subsections 12(10) and 23(2), 1.58
paragraphs 23(3)(b), 23(4)(c) and 23A(a) and section 25 of the Rates
Act
Item 44, subsection 23(7) of the Rates Act 1.61
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Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
Item 45, paragraph 23(6)(b) of the Rates Act 1.59
Items 49 to52, 55and56, subsections 12(10) and 23(2), 1.62
paragraphs 23(3)(b), 23(4)(c) and 23A(a) and section 25 of the Rates
Act
Item 53, paragraph 23(6)(b) of the Rates Act 1.63
Item 54, subsection 23(7) of the Rates Act 1.65
Subitem 57(1); Schedule 4, subitem 58(1) 1.86
Subitem 57(2) Table 1.8
Subitem 57(3) Table 1.8
Subitem 57(4) Table 1.8
Subitem 57(5) Table 1.8
Subitem 57(6) Table 1.8
Subitem 57(7) Table 1.8
Subitem 57(8); Schedule 4, subitem 58(2) 1.91
Subitem 57(9) Table 1.9
Subitem 57(10) Table 1.9
Subitem 57(11) Table 1.9
Schedule 2: Amount of tax discount for unincorporated small
businesses
Bill reference Paragraph number
Item 1, subsection 328-360(1) 2.10
Item 2, subsection 328-360(1) 2.10
Item 3, subsection 328-360(1) 2.10
Item 4, subsection 328-360(1) 2.9
Subitem 5(1) Table 2.2
Subitem 5(2) Table 2.2
Subitem 5(3) Table 2.2
Subitem 5(4) Table 2.2
62
Index
Schedule 3: Access to small business concessions, etc
Bill reference Paragraph number
Items 1, 4, 8, 10, 11, 14, 16 and 19, section 152-5, paragraph 150- 3.19
10(1)(c) (note), subsection 152-10(1A) (note 2),
subsection 152-10(1B)(note 1 and note 2), subsection 328-110(1)
(note 1 and note 2), subsection 328-110(3)(heading) and section
328-350
Items 2, 3, 5 to 7, 9, 12 and 13, subparagraphs 152-10(1)(c)(i) and 3.17
(iii), subsection 152-10(1AA), paragraphs 152 10(1A)(a), 152-
10(1A)(d) and 152-10(1B)(b), subsection 152-48(1) and section 152-
100
Items 15, 17 and 18, paragraphs 328-110(1)(b), 328-110(3)(b) 3.11
and 328-110(4)(b)
Item 20, section 328-357 3.14
Item 21, subsection 995-1(1) 3.20
Subitem 22(1) 3.21
Subitem 22(2) 3.22
Subitem 22(3) 3.23
Schedule 4: Main consequential amendments relating to
imputation
Bill reference Paragraph number
Items 1 to 26, sections 36-55, 197-45, 197-60, 197-65, 200-25, 1.75
202-55, 202-60, 203-50, 215-20, 705-90, 707-310, 976-1, 976-10,
976-15 and the definition of 'corporate tax gross-up rate' in
subsection 995-1(1) of the ITAA 1997
Items 27 and 29, definition of 'corporate tax rate' in 1.76
subsection 995-1(1) of the ITAA 1997
Item 28, paragraph (a) of the definition of 'corporate tax rate for 1.73
imputation purposes' in subsection 995-1(1) of the ITAA 1997
Item 28, paragraph (b) of the definition of 'corporate tax rate for 1.74
imputation purposes' in subsection 995-1(1) of the ITAA 1997
Items 30 to 57, sections 36-55, 197-45, 197-60, 197-65, 200-25, 1.77
202-55, 202-60, 203-50, 215-20, 705-90, 707-310, 976-1, 976-10,
976-15 and the definitions of 'corporate tax gross-up rate' and
'corporate tax rate' in subsection 995-1(1) of the ITAA 1997
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Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
Schedule 5: Other consequential amendments
Bill reference Paragraph number
Items 1, 2, 14, 15, 21, 22, 28, 29, 35 and 36, subsections 65-30(2) Table 1.6
and 65-35(3A) of the ITAA 1997
Items 3 to 5, 8, 10 to 13, 16 to 20, 23 to 27, 30 to 34 and 37, Table 1.7
examples in subsections 36-17(5), 36-55(1), 36-55(2) and
115-280(3) of the ITAA 1997
Item 9, definition of 'statutory percentage' in subsection 160AAB(1) 27.5
of the ITAA 1936
64