Meaningful tax reform for small business at last?
The Federal Government's discussion paper released at the end of March is the first step towards a review of the Australian tax system and has prompted speculation as to whether it will in fact be a meaningful review.
The paper acknowledges "compliance costs associated with regulation are felt most by small business" and a chapter dedicated to small businesses presents a number of options for taxation reform.
Amongst some of the suggestions, Treasury said in the paper "it may be possible to introduce a lower or zero tax rate on small companies". This mean that any reduction in the corporate tax rate would translate into an increase in working capital in those companies and allow them to expand and grow their business which can only be good for the Australian economy. But eliminating tax for small business would come at a trade-off such as forgoing "specific, small business concessions" including industry specific tax breaks and broader concessions such as those reducing Capital Gains Tax.
Another option raised by the discussion paper relates to businesses that operate through trusts. Trusts are just one option for structuring small enterprises and each type of business structure is treated differently under tax law, making the choice of structure a costly and confusing exercise. The paper raised the consideration of adopting the "S-Corporation" model that operates in the US. This is a single tax structure that can pass corporate income, losses, deductions and credit through to shareholders for tax purposes. The company itself is not taxed with all taxation done at the individual income level.
The tax discussion paper also highlights the pressure that could be placed on the complex Division 7A tax regulations, as any reduction in the corporate tax rate would exacerbate the gap between company and individual tax rates. The anti-avoidance regulations of Division 7A are designed to discourage businesses from distributing loans to shareholders or their associates for personal use and enjoyment. The provision over time has become increasingly complex and now captures all sorts of transactions, adding to compliance costs for business.
The options for small business taxation contained in the discussion paper will depend on how the government chooses to define small business. It needs to be simple as we don't want small businesses to get bogged down in compliance and at the same time it has to be fair.
Pitcher Partners will be monitoring this keenly.
The Pitcher Partners State Tax Review
2014/15 is now available. It compares the
State taxes payable by small to medium
sized companies during the 2014/15
The review focuses on the State taxes
payable by two different sized hypothetical
start-up companies in the five largest
states (NSW, VIC, QLD, SA and WA). The
size of companies is relevant due to the
application of progressive thresholds on
certain duties and taxes.
The review also determines the total annual
cost of Workers’ Compensation Insurance
(“WorkCover”) premiums, payroll tax,
transfer of land duties and land tax for each
company in each State.
To obtain a copy email