The Henry Review of Tax
The Henry Review of Tax > Australia’s Future Tax System
After sitting on the Review since 20 December 2009, the Government published Henry’s final report to Treasury on 2 May. At the same time they announced their response to the report which was heavily weighted to what they had ruled out rather than what they were considering as the basis for the future of taxation across Australia. The following looks at the Review’s critical assessment of the capital allowances regime and the recommendations made in that area and the Government’s response to those recommendations.
Capital allowances review
The main thrust of the review of the existing capital allowances provisions is that the current system is complex and has inherent biases in its design. This is borne out by the title of the section ‘Current depreciation arrangements are distortionary’. The recommendation is to enhance and streamline the provisions to close the gap between the tax effective rates of depreciation and the economic depreciation and to reduce the administrative and compliance burden.
The Report highlights the complexity of the current capital allowances regime with its 40 different effective lives detailed for 3,700 asset types as well as the special or preferential rules for specific assets and types of taxpayers. Henry seeks to simplify the design of the system but recognises that this may adversely impact the underlying principle of closely matching the economic depreciation of the assets.
The Review neatly sidesteps the vexed issue of green depreciation but the underlying principle of keeping the capital allowances regime as a mirror to economic depreciation seem to rule out special treatment for such expenditure. Where the Review does examine sustainability and environmental issues there is a preference for specific grants over tax concessions.
A positive move that would remove record keeping requirements is the recommendation of replacing the low-value pool with an immediate write off of assets with a cost of less than $1000. There is no mention of what happens to assets whose adjusted values fall below $1000 which are currently eligible to be dropped into the low-value pool at that point.
The second part of the recommendation calls for a review of the impact of special provisions such as capped effective lives, the capital works provisions and the treatment of exploration, agricultural and forestry expenditure.
The Review also suggests consideration should be given to grouping assets with a related use or purpose. The example given is that of information technology, but in a property context the grouping of air conditioning assets or furniture would significantly simplify the process of allocating effective lives and cost bases.
The Review seeks to provide certainty and cash flow benefits to small businesses which accounts for 2.4 million businesses in Australia.
The recommendation for small businesses is that an immediate write off would be available for assets with a cost of under $10,000 and that all other assets (other than building works) would be depreciated in one pool instead of the current two. This would only marginally reduce the complexity and administrative burden on small businesses but would provide accelerated depreciation benefits. However, when looked at alongside other measures, this recommendation would add to the overall simplification for small businesses.
The Government response
The Government’s response has picked up the recommendation to abolish the low-value pool as well as the enhanced capital allowances relief for small businesses. However they have reduced the cost base for write offs for small businesses to $5000. The important thing to note is that the recommendations found in the Henry Report were intended to be complimentary and not a shopping list which could be picked at which is unfortunately the approach the Government appears to be taking. We will know more when the Budget is unveiled on the 11th May.