Last week, the Federal Government released for comment draft legislation to repeal the Minerals Resource Rent Tax (MRRT), the “mining tax”, and related tax measures, with effect from 1 July 2014. The very short one-week time period for comments no doubt means the repeal Bill is likely to be introduced on Parliament’s first or second sitting days, ie either 12 or 13 November 2013.
The Draft Bill also proposes to make changes concerning the Petroleum Resource Rent Tax laws, but it is the flow-on changes concerning SME tax concessions that will receive much of the publicity.
The Bill would discontinue or re-phase the measures that were intended to be funded by the mining tax. These amendments involve some technicalities and include:
- Repeal of company loss carry back – under the changes, companies would only be able to carry their tax losses forward to use as a deduction for a future year. The transitional provisions related to the introduction of the loss carry-back measure would also be repealed. Note that some of the more general improvements to the income tax law that were made as part of the loss carry-back measure would not be repealed eg the inclusion of the amount of a taxpayer’s refund from refundable tax offsets in the taxpayer’s income tax assessment;
- Reduction in the small business instant asset write off threshold – the current $6,500 threshold for depreciating assets, costs incurred in relation to depreciating assets, and low pool values under the small business entity capital allowance rules will go back to $1,000. Under the proposed changes:
- Small business entities would be able to claim a deduction for the value of a depreciating asset that costs less than $1,000 in the income year the asset is first used or installed ready for use.
- Small business entities would be able to claim a deduction for an amount included in the second element of the cost of a depreciating asset that was first used or installed ready for use in a previous income year. The amount must be less than $1,000.
- Small business entities would be able to allocate depreciating assets that cost $1,000 or more to their general small business pool and claim a deduction for the depreciation of the assets in the pool.
- Under existing arrangements, a small business entity can deduct the value of its general small business pool at the end of an income year if the value of the pool at the end of the year is less than $6,500 (this value is determined prior to applying any applicable rates of depreciation to the pool). The proposed amendments would reduce this so-called “low pool value” threshold to $1,000, meaning that a small business entity could deduct the entire value of its general small business pool at the end of an income year if the value of the pool at the end of the year is less than $1,000.
- Assets allocated to the general small business pool would depreciate at a rate of 15% in the year they are allocated, and a rate of 30% in subsequent income years.
- If the value of a small business entity’s general small business pool is less than $1,000 at the end of the income year, the small business entity would be able to claim a deduction for the entire value of the pool.
- Repeal of accelerated depreciation for motor vehicles – Under existing arrangements, a small business entity can claim a special deduction in respect of a depreciating asset that was a motor vehicle in the income year in which the vehicle was first used or installed ready for use. That deduction is equal to the taxable purpose proportion of the first $5,000 value of the motor vehicle plus 15% of any additional value. The remaining value of the motor vehicle is then allocated to the small business entity’s general small business pool and depreciated as part of that pool at an ongoing rate of 30% in later income years. These rules only apply where the motor vehicle cost $6,500 or more (as motor vehicles that cost less than $6,500 are written-off under the general instant asset write-off rule). The repeal of the mining tax would see the repeal of these special rules for certain motor vehicles. In the absence of these special rules, the general capital allowance provisions will apply to depreciating assets that are motor vehicles in the same way they do to all other depreciating assets;
- Compulsory super increase to be delayed – The phase-in of the increase in the rate of compulsory super would be delayed by 2 years. The compulsory superannuation percentage would pause at 9.25% for the years starting on 1 July 2014 and 1 July 2015, and increase to 9.5% for the year starting on 1 July 2016, and then gradually increase by half a percentage point each year until it reached 12% for years starting on or after 1 July 2021;
- Repeal of the low income superannuation contribution – currently, this is a government superannuation contribution made on behalf of individuals with an adjusted taxable income (ATI) of $37,000 or less in an income year. The maximum contribution amount payable is $500. Under the Draft Bill, it would not be payable in respect of concessional contributions made after 1 July 2013;
- Repeal of the income support bonus – currently, this is a tax-free, indexed, non-means tested payment that is paid twice annually to eligible social security recipients. Current rates are $105.80 for single people (or $211.60 per annum) or $88.20 for most people who are an eligible member of a couple (ie $176.40 per annum per person). The bonus will be repealed with the removal of the mining tax; and
- Repeal of the schoolkids bonus – this is an indexed payment that is available to eligible families receiving Family Tax Benefit Part A and young people in school receiving Youth Allowance or certain other income support or payments. It is exempt from income tax. The bonus will be repealed with the removal of the mining tax.
In general, the amendments would apply from 1 July 2014.
Date of effect:Capital allowances for small business
With the exception of the amendments in relation to low pool values, the capital allowance amendments would apply from 1 January 2014. These amendments include the changes in relation to depreciating assets that are first used or installed ready for use at a particular time, changes in relation to amounts included in the second element of the cost of a depreciating asset that has been written-off in an earlier income year, the repeal of the special rules for certain motor vehicles, as well as the consequential amendments to other provisions.
In the majority of cases, the above amendments would begin to apply part-way through a small business entity’s 2013-14 income year (with the exception of a small business entity with a substituted accounting period that finishes on 31 December).
Depreciating assets: Depreciating assets that are first used or installed ready for use in the part of the income year that to 1 January 2014 are subject to the $6,500 threshold. The $1,000 threshold would then apply to assets that are first used or installed ready for use in the remaining part of that income year. Where a depreciating asset is both installed ready for use and first used in the same income year, but these two events occur at different times during the income year, the $6,500 threshold would continue to apply to the asset if it was installed ready for use prior to 1 January 2014. The $1,000 threshold would apply to a depreciating asset that is first used on or after 1 January 2014 only if it was not installed ready for use before 1 January 2014.
Amounts included in second element of cost of depreciating assets: The changes in respect of amounts included in the second element of a depreciating asset’s cost would apply to amounts that are incurred on or after 1 January 2014. The $6,500 threshold would therefore apply to amounts incurred in the part of an income year that occurs prior to 1 January 2014, whereas the $1,000 threshold would apply to amounts that are incurred on or after 1 January 2014.
Low pool values: The amendments in relation to low pool values would apply to income years that finish on or after 1 January 2014.
Special rules for certain motor vehicles: As with the proposed changes for depreciating assets and amounts included in the second element of the cost of such assets, the repeal of the special rules for certain motor vehicles would apply to motor vehicles that are first used or installed ready for use on or after 1 January 2014. Note that the special rules will still apply to a motor vehicle that is first used in a part of an income year that occurs after 1 January 2014 if it was installed ready for use in an earlier part of that income year which occurred prior to 1 January 2014.
While the repeal of the mining tax and its associated measures was expected, the changes if legislated will create some complexities. They are likely to create some confusion amongst SMEs. Small businesses should keep a close eye on progress of the amending legislation when it comes before Parliament and consult with their accountant or adviser as to the implications for their own circumstances.
Terry Hayes is the Editor-in-Chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.