The Federal Government’s recently released Tax Discussion Paper, “Re:think” is an excellent starting point for addressing tax reform. The cost of complying with the tax system, however, still falls disproportionately on SMEs.
SME businesses incur nearly half of the total tax compliance costs, but contribute only one third of company tax payments. Of the 800,000 companies in Australia, the upper 2,000 pay two thirds of the total company income tax. This presents a significant opportunity to simplify the tax 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.
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 differing definitions of small businesses.
In our opinion, rather than trying to fix broken parts of the tax system, the idea of a special purpose small business entity has real merit,. 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 also form the basis on which the various concessions available to SME businesses are accessed, overcoming the existing definition issues
The Tax Discussion Paper makes reference to the S-Corp Model used in the United States. While this is the seed of a good idea, it’s important that Australia doesn’t replicate the complexity of the US tax system.
There are numerous other areas where changes could be made to support SME businesses, and develop a fairer and more efficient tax system.
These include:
- Having a single tax authority (the Australian Taxation Office). The alternative, 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 more efficient taxes.
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.
- Target avoidance measures at larger businesses rather than SME taxpayers. This will focus the more complex measures on the most economically significant taxpayers and those with greater resources to deal with the complexity. Any avoidance measures should be as targeted on the avoidance issue as possible.
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.
Author: Greg Travers, Original Article
Director, Tax Services
William Buck
