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Pressure has been placed on the government to correct an oversight in its full expensing measure that tax experts believe creates adverse outcomes for small businesses.
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Government pulled up on small business full expensing discrepancy
03 February 2021
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Chartered Accountants Australia and New Zealand, CPA Australia, the Institute of Public Accountants, Law Council of Australia, Tax & Super Australia, and The Tax Institute have now written to the Treasury to request for the law to be amended to afford small businesses with pool balances the flexibility to fully expense assets on an asset-by-asset basis.
The request comes after a bill was passed late last year to allow entities to opt out of temporary full expensing and the backing business investment incentives on an asset-by-asset basis.
Amendments in the bill were made to Division 40 of the Income Tax Assessment Act, with no amendments made to Subdivision 328-D that many small businesses use to calculate their depreciation.
The joint bodies believe the amendments have failed to accord the same flexibility to small business entities because they are required to fully deduct their general small business pool balances on 30 June 2021 and cannot choose not to write off the pool balance.
They note that while small business entities can choose not to use Subdivision 328-D for an income year, the outcome does not change.
“If an SBE chooses to exit Subdiv 328-D and instead apply Div 40 of the ITAA 1997 to their depreciating assets, section 328-220 of the ITAA 1997 applies to require the SBE to continue to apply Subdiv 328-D to the pool for the income year in which they exit Subdiv 328-D and all later income years,” said the joint submission.
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“This means that section 328-210 of the ITAA 1997 will continue to apply, as temporarily modified, in its operation by subsection 328-181(5) of the IT(TP)A.”
‘Adverse outcomes’
The joint bodies believe the discrepancy goes against the policy intent of the measure, and could create adverse outcomes for small businesses, particularly those operating through discretionary and unit trusts.
“Full expensing may result in a loss being made by a trust, resulting in the trust having no distributable income,” said the joint submission.
“This will be most evident where the income of the trust estate in the deed is defined to be equal to the net income as defined in section 95 of the Income Tax Assessment Act 1936 (income equalisation clause), and will result in the inability of the trustee to distribute any franking credits attached to dividends received by the trust to beneficiaries, or fully utilise the franking credits.
“This issue concerns many of our members whose SBE clients will face adverse tax outcomes because of the mandatory fully expensing of pool balances, some of which are of significant values.”
The professional bodies argue that the policy intent was to allow entities to choose whether to apply full expensing, and that there was no suggestion that it was only meant for businesses that are not small businesses with pool balances.
“The Joint Bodies seek that the law be amended to provide SBE taxpayers with the same flexibility as larger businesses, and to ensure that larger businesses are not treated more favourably than SBEs, or those that are still subject to the pooling rules in Subdiv 328-D after making a choice to exit Subdiv 328-D,” the submission said.
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