Greg Travers, Director of Tax Services at William Buck Accountants and Advisors
Small businesses make up 35 per cent by value of Australiaโs economy. They employ large numbers of Australians and play a key role in the prosperity of our country.
Laborโs proposed tax policies target specific areas where they perceive abuse of the tax system, or inequitable and inappropriate tax outcomes are arising. The risk with Laborโs tax policies is the unintended impact on other parts of the economy, notably small business.
Hereโs five changes to Laborโs tax policies, that will support the ongoing growth and success of small businesses.
1). 30 per cent minimum tax on trust distributions amended to 27.5 per cent for trusts that are small businesses
The reality is many small businesses operate through a trust structure. Currently, companies are able to access the โsmall businessโ tax rate of 27.5 per cent. Imposing a higher 30 per cent minimum tax on trust distributions will disadvantage small businesses operating through trusts, relative to those operating in companies.
By giving all small businesses a 27.5 per cent tax rate, irrespective of what structure the small businesses are operating through, Labor would create a level playing field. This would give the same tax outcome for small business, regardless of whether they are operated by a company or a trust, while also creating fairness in the system.
2). Small business exemption on the $3000 limit on deduction for fees for tax advice
At the moment, thereโs no limit on the tax deductions for fees for tax advice. Labor is proposing to introduce a $3000 limit for individuals, trusts and partnerships. This measure is targeted at a small number of ultra-high wealth individuals who are claiming hundreds of thousands of dollars in deductions each year.
By imposing a blanket limit, this measure risks penalising small businesses who are not looking at aggressive strategies, but merely dealing with the tax issues that come from owning and operating a business.
Increasing the cost of obtaining tax advice will mean some small businesses canโt afford to – or will choose not to – get the tax advice they should. This would increase the non-intentional non-compliance in the tax system. This is already a significant issue with small business taxpayers; outing tax revenues at risk and requiring more resources from the ATO to administer the tax system. This is not a good outcome for anyone.
3). Carve-out small businesses and business owners on the proposed new limits on negative gearing
Often small business owners need to borrow against their home to access the money needed to invest in their business. As a consequence, interest deductions will be claimed by the business owner (who has borrowed the money) not the entity that operates the business.
Laborโs negative gearing policy is targeted at passive investors. But itโs also a measure which could unfairly impact small business owners, who may no longer have the ability to fully deduct the interest cost.
It is already hard enough for small businesses to access finance, Labor needs to ensure that this policy doesnโt make it even harder.
4). Implement the long overdue Division 7A reforms
Division 7A is a complex anti-avoidance measure that affects most small businesses. The Government, Treasury and the Board of Taxation have all recognised that the rules need fixing.
To support small business, Labor should act to reduce the complexity they need to navigate in the tax system. Division 7A is the right place to start.
A good policy would see a simplification of the existing rules. A reasonable balance should be struck between preventing shareholders inappropriately accessing company profits and enabling small business to borrow from related private companies, so they can fund investment in their business and business assets.
5). Set a higher threshold for what constitutes a small business
What is a small business? Currently a $2million turnover threshold applies to the small business CGT exemptions; a $10 million threshold applies to depreciation concessions, and a $50 million threshold applies to the lower company tax rate.
If Labor is serious about supporting Australian businesses and making it easier for them to do business, they will use a high turnover threshold for determining who is a small business.
$10M is the minimum that should be used but, $25 million would be better. While $50M might be an ambitious request, it would also mean that most business wouldnโt need to worry about breaching the threshold (and the additional complexity and compliance costs this will bring) and can instead focus on growing their business and employing more people. Surely that is the outcome that we should be aiming for?
Some concessions may need a different threshold, or a combination of eligibility criteria. However, wherever possible, a single higher revenue-based threshold would dramatically reduce compliance costs for small businesses.
Whether you support their tax policies of not, if Labor win the election they will have a mandate to implement them. The measures need to target the real issues – small business canโt be collateral damage. These five tax changes will help Labor help small business.
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