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Small business tax law is ripe for reform, with the current system more complex than ever, argues The Tax Institute.
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Small business tax system ‘crying out for simplification’
29 December 2020
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Figures from the Australian Small Business and Family Enterprise Ombudsman show that small and family businesses account for 98 per cent of all businesses in Australia, 35 per cent of Australia’s gross domestic profit and employ 44 per cent of Australia’s workforce. Yet there is no clear and singular meaning of what constitutes a small business.
The Tax Institute’s director, tax policy and technical, Andrew Mills, believes that while many programs, benefits and concessions that exist in tax law are designed to support small businesses through the various stages in the business life cycle, the constant changes, complexity of the law and integrity rules compound to make compliance very challenging for small businesses and their advisers.
“The law applying to small business is more complex than ever, and is crying out for simplification,” Mr Mills said. “There are too many ways in which small businesses can inadvertently trip up, and find they are actually not eligible for something they thought they qualified for.
“We’ve counted 25 different small business tax concessions, many of which have different turnover thresholds and eligibility conditions, as well as different application dates.
“A good tax system should finely balance simplicity, efficiency and equity. Arguably, the current system for small businesses achieves none of these.”
The sector has not lacked attention over the years, with various reviews being undertaken of the small business tax concessions. The most recent, the March 2019 review by the Board of Taxation, made 12 recommendations including that the aggregated turnover threshold should apply uniformly across all of the current “small business entity” tax concessions.
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The small business CGT concessions have been amended many times since their inception in September 1999, replacing the former 50 per cent goodwill exemption. The current concessions are now so complex that many practitioners choose to refer this work to specialists rather than take on the risk of advising in this complex area, in much the same manner as transfer pricing or consolidations work is referred to large corporate specialists.
“The question must be asked: are the rules still fit for purpose or is there a simpler way of providing relief to small businesses?” Mr Mills said.
“There is merit in replacing the current four concessions with a single ‘lifetime business retirement exemption’ which would allow a small business operator to disregard any profits or gains made on the disposal of business assets on an asset-agnostic basis, i.e. whether they be goodwill, real property, depreciating assets or intellectual property, up to a lifetime cap amount, say, $1.6 million which could be concessionally contributed to superannuation.
“This would reduce complexity, while still providing appropriate tax relief on the sale of business assets. A single replacement asset rollover could complement the superannuation contribution model, as an alternative option.”
Mr Mills also believes the existing model of taxing business income also needs to be reformed. The current interaction of the two-tiered corporate tax rate, the imputation system, the rules in Division 6 applying to trusts and Division 7A has resulted in many more corporate beneficiaries being set up than would have been the case if there was a less penal rate of rate for trusts that do not fully distribute their business profits.
“Whatever the reform for small businesses, it is clear that the current law is not sustainable, and change is necessary,” Mr Mills said.
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