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The government's tax discussion paper is an excellent starting point for addressing tax reform. However, the cost of complying with the taxation system still falls disproportionately on SMEs, something which needs to change.
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Tax paper positive but more unique reforms are needed
10 April 2015
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There are more than 800,000 companies in Australia, and 2,000 of them pay two thirds of the total company income tax. This presents a massive opportunity to simplify the taxation system as it applies to the other 798,000 companies, many of which are the SME businesses that are vital to Australia’s ongoing prosperity.
The cost of complying with the taxation system falls disproportionately on SME businesses. SME businesses incur nearly half of the total tax compliance costs, but contribute only one third of company tax payments.
Some of the many examples of where the tax system adds complexity and compliance costs for SME businesses include Division 7A (loans and payments from private companies), the taxation of trusts, the eligibility conditions for various concessions and the plethora of different definitions for small businesses.
The idea of a special-purpose small business entity has real merit as a way to eliminate tax compliance costs for SME businesses. Rather than trying to fix broken parts of the tax system, the government could look for a new approach.
A properly-designed small business entity should eliminate the need for most businesses to deal with a range of complex tax issues, such as Division 7A and trusts.
It could form the basis on which the various concessions available to SME businesses are accessed as well as overcome the existing definition issues.
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The S-Corp model referenced in the tax discussion paper is the seed of a good idea, but the complexity of the US systems is something Australia needs to prevent replicating.
There are numerous other areas where changes could support SME businesses, and principles that should be followed to ensure a better, fairer and more efficient tax system.
These include:
• Having a single tax authority (the Australian Taxation Office). Giving greater taxing authority to the states will add significant compliance costs for SME businesses.
• Removing small taxes that are ineffective or where the issue can be dealt with appropriately through other taxes (income tax or GST in particular) would be beneficial. FBT is a good example of this. The cost for SME businesses to comply with FBT is high. The majority of the benefits taxed under the FBT regime could be efficiently dealt with under the income tax regime, which is the approach that most other countries have taken.
• Targeting tax measures at genuine businesses rather than taxpayers with passive investments. It is the businesses that are driving economic benefits, through increased employment and economic activity, that need support. A challenge will be distinguishing between business activities and passive activities, particularly at the margins.
Overall the government should be congratulated for the discussion paper initiative. It is clear that a lot of thought has gone into it. With political will and constructive input from the broader public, there is a real opportunity for genuine reform of the tax system.
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