Simplified Tax System (STS) - five year restriction on re-entry

For the purposes of working out when an entity that has chosen to stop being an STS taxpayer can next become an STS taxpayer under subsection 328-440(3) of the Income Tax Assessment Act 1997 (ITAA 1997), is the income year the entity 'left the STS': (a) the income year for which the entity lodges an income tax return in which it notifies the Commissioner of its choice to stop being an STS taxpayer; or (b) the last income year for which the entity was an STS taxpayer?

For the purposes of subsection 328-440(3) of the ITAA 1997, the year an entity left the STS is the last income year for which it was an STS taxpayer.

An entity chose to become an STS taxpayer (as defined in section 328-435 of the ITAA 1997) for the income year ended 30 June 2002. The entity in its return of income for the income year ended 30 June 2003 chose to stop being an STS taxpayer.

The entity wants to know whether for the purposes of subsection 328-440(3), they left the STS in the income year ended 30 June 2002, which is the last income year for which it is an STS taxpayer, or the income year ended 30 June 2003.

Section 328-440 of the ITAA 1997 explains how an STS taxpayer can leave the STS: • they may voluntarily choose to leave; or • they cease to be eligible for the STS.

If the STS taxpayer leaves by either method they need to notify the Commissioner of this in the approved form (subsections 328-440(1) and (2) of the ITAA 1997).

There are restrictions on an entity re-entering the STS where they have chosen to leave. Subsection 328-440(3) of the ITAA 1997 states:

If you choose to stop being an *STS taxpayer, you cannot again become an STS taxpayer until at least 5 years after the income year that you left the STS.

*Denotes a term defined in section 995-1 of the ITAA 1997.

The choice to be an STS taxpayer under Subdivision 328-G of the ITAA 1997 is one that applies 'for' an income year. Having made the choice 'for' a particular income year to become an STS taxpayer, the entity is, as per the opening words of subsection 328-440(1) of the ITAA 1997, either maintaining this status 'for each later income year', or advising the Commissioner of how their status in this respect has changed.

To determine which income year an entity that has chosen to stop being an STS taxpayer can re-enter the STS, the entity needs to know in which income year they 'left the STS'.

For the purposes of subsection 328-440(1) of the ITAA 1997, the year such an entity left the STS, given the context set out above, is not the income year when the entity informs the Commissioner, but the last income year that the entity was an STS taxpayer. This interpretation is supported by paragraph 3.8 of the Explanatory Memorandum, New Business Tax System (Simplified Tax System) Act 2001 .

In this case, the income year ended 30 June 2002 is both the entity's first and last year as an STS taxpayer, and therefore, for the purposes of subsection 328-440(3) of the ITAA 1997 it is the income year they 'left the STS'. The five year exclusion period would conclude for the income year ended 30 June 2007, and the entity can re-enter the STS, if eligible, for the income year ended 30 June 2008.