After the budget, what next…?

… more tax changes, that’s what, and more tax hoops to jump through. TERRY HAYES of Thomson Legal & Regulatory leads us through the maze.

By Terry Hayes

Another federal budget is now done and dusted. The legislation for the tax cuts, to apply from both July 1, 2007, and July 1, 2008, has already been introduced.

With Labor saying it will support the cuts, it is expected that the legislation will be passed to come into effect on the above dates. So, the tax planning issues I outlined in my  May 3 column  should now come into play.

So what now? Silly question. More tax changes of course!

The Government introduced the Tax Laws Amendment (Small Business) Bill 2007 into Parliament on May 10, which it says will reduce compliance costs for many small business entities. Let’s hope so, but there are a few hoops for SMEs to jump through before the claimed compliance cost reductions can be obtained.

I’ll give an outline of what the bill proposes to do, but as with all things tax, the changes are not necessarily simple and it will be wise for SMEs to speak to their accountants. The bill contains amendments mostly intended to take effect from July 1, 2007, and constitute what was originally termed in the 2006-07 federal budget as “a package of measures to simplify and improve alignment of various small business [tax] concessions”. So far, so good – sounds great!

Specifically, the bill will:

• Align the simplified tax system (STS) and GST definitions of turnover, with turnover calculated including input taxed supplies, and the period over which turnover is calculated.
• Increase the GST cash accounting turnover threshold and the STS threshold from $1 million to $2 million.
• Increase the CGT maximum net assets threshold from $5 million to $6 million.
• Extend the availability of rollover relief under the uniform capital allowance system to small business entities.
• Remove the $3 million depreciating assets test from the STS eligibility requirements.
• Give STS taxpayers access to the FBT car parking exemption concession (with effect from April 1, 2007).

The bill introduces a standard eligibility criterion that applies across the small business tax concessions. In essence, entities that satisfy an aggregated turnover test of $2 million a year will be able to access those concessions.

The bill amends the tax law to provide a single definition of a “small business entity” for the purpose of accessing any of the small business tax concessions.

Under the proposed changes, an entity is a small business entity if it:

• Carries on a business.
• Satisfies the $2 million aggregated turnover test (see below). This test applies to the business income of the entity, not to each business conducted by the entity.

The Assistant Treasurer said that, under the new legislation, “small businesses will only have to apply one eligibility test relating to the size of the business (the $2 million turnover test) to access a range of small business concessions”. Any entity that satisfies the small business entity test can choose to access the following 12 concessions (subject to any additional criteria set out in the particular concessions themselves):

• CGT 15-year asset exemption.
• CGT 50% active asset reduction.
• CGT retirement exemption.
• CGT rollover.
• Simplified depreciation rules.
• Simplified trading stock rules.
• Immediate deduction for certain prepaid business expenses.
• Choice to account for GST on a cash basis.
• Annual apportionment of GST input tax credits.
• Choice to pay GST by instalments.
• FBT car parking exemption.
• PAYG instalments based on gross domestic product (GDP) adjusted notional tax.

Partners in partnerships that are small business entities can also access the small business CGT concessions.

But wait, there’s more! And here’s where it gets a bit messy – the devil is always in the tax detail.

There are three ways an entity can satisfy the $2 million aggregated turnover test in order to be able to access the SME tax concessions:

• Test 1 : The entity’s aggregated turnover for the previous income year was less than $2 million, regardless of its likely or actual aggregated turnover for the current year.
  The Government considers that most small business entities will only need to consider this test because their aggregated turnover in the previous income year will be less than $2 million.
• Test 2 : The entity’s aggregated turnover for the current income year, worked out as at the first day of the income year , is likely to be less than $2 million. References to “as at the first day of the income year” mean that the assessment needs to be based on the entity’s state of affairs that existed as at the first day of the income year. It does not mean that the assessment of the entity’s situation must be performed on the first day of the income year.
  Any reference to “likely” means that, on the balance of probabilities, it is more likely than not that the entity’s aggregated turnover will be less than $2 million.
  To prevent abuse of the “likely” test, the proposed law provides that an entity cannot use Test 2 if its aggregated turnover in each of the previous two income years (worked out as at the end of those years) was greater than $2 million.
  However, the entity may be able to access some of the small business concessions at the end of the income year if its turnover for that year was actually less than $2 million.
• Test 3 : The entity’s aggregated turnover for the current income year, worked out as at the end of the current income year is actually less than $2 million.
  The turnover calculation is based on the entity’s actual aggregated turnover for the income year in which the concessions are sought. If the SME started to carry on a business part-way through the income year, it will need to calculate what its turnover would have been had the entity carried on the business for the entire income year.
  The Government says this rule exists so that, despite an entity’s previous aggregated turnover, or the entity’s likely aggregated turnover, it is a small business entity if its actual aggregated turnover is less than $2 million in an income year.

And of course, “aggregated turnover” has its own definition for the above tests. An SME’s annual turnover includes all income according to ordinary concepts derived in the ordinary course of carrying on a business, but not other income, such as salary or wages. An SME does not include amounts relating to GST when working out its turnover.

This is necessarily a brief snapshot of the proposed new laws. While they should give SMEs easier access to some very useful tax concessions, it will be essential that businesses seek professional advice on how the new laws might work for them.

Terry Hayes is the senior tax writer at Thomson Legal & Regulatory, a leading Australian provider of tax, accounting and legal information solutions; www.thomson.com.au

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