While small businesses are set to gain from a 2% cut in the company tax rate and the ability to immediately write-off assets worth up to $5,000, the Government has still ignored dozens of recommendations from the Henry Review that could help struggling SMEs.
Business representatives are especially concerned about the lack of any announcement on payroll tax reform, even though the Review specifically states the tax could be abolished in favour of broader state taxes.
Jaye Radisich, chief executive of the Council of Small Businesses of Australia, says there is room for introducing further reform, including recommendations that were noted in the review but ignored by the Government.
“Naturally small businesses would have preferred an increase in the instant write-off threshold to $10,000 as recommended by the Henry Review, however the $5,000 threshold represents a significant improvement on the current arrangements,” she said.
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“The Council of Small Business looks forward to the Government’s further announcements on making tax time simpler for working families, especially for sole traders and partnerships.”
Several other business leaders, such as Australian Industry Group chief executive Heather Ridout, have spoken out against the Government’s response to the Review, saying it is ultimately underwhelming.
“(Tax reform) is not an optional process, if we don’t do it we will end up with a very bad tax system,” she said in ABC Radio. “(And) the Government hopefully will do more in the budget.”
Ray Cummings, partner at Pitcher Partners, says the Government has left out many recommendations that could have helped small business, and several of them must be considered.
“It has stated that the steps announced today “are the first steps in a 10-year agenda” but it hasn’t been prepared to say what that agenda might be. The Policy document issued today contained only a handful of substantive issues.”
The Government has said it will continue to look at measures recommended by the Henry Review, including tax breaks for interest gained on savings and the introduction of an optional tax return system.
But for now, here are some of the biggest recommendations small businesses missed out on:
Payroll tax abolition
The Review suggests replacing state payroll taxes with revenue from more efficient broad-based taxes that “capture the value-add of labour”, which could include types of land tax. Additionally, the Review also suggested the ATO could act as a central distribution authority for these taxes.
Peter Anderson, chief executive of the Australian Chamber of Commerce and Industry, says the recommendation on payroll tax “definitely should have been followed up”.
Company tax rate of 25%
While the Government has adopted the suggestion to reduce the company tax rate to 28%, the Review actually suggests a drop to 25% over the short- to medium-term, with the timing subject to “economic and fiscal circumstances”.
While only a 2% cut has been flagged so far, treasurer Wayne Swan has said further cuts could be made depending on Government revenues in the future.
“Although the Henry Review recommended a company tax cut down to 25%, a reduction from 30% to 28% will still provide a strong cashflow boost for many small business companies.”
Income tax reductions
While much of the Henry Review response has been focused on small business, there are also a range of recommendations for reducing income tax burdens for individuals. Director of economics and industry policy at the Australian Chamber of Commerce and Industry, Greg Evans, says the Government could have taken up a recommendation for further cuts.
“Once you start moving the company tax rate, there is pressure then to drop the top personal tax rate. We wouldn’t expect that to be totally out of line, and we think there is unfinished business in the area of income tax.”
Assets worth up to $10,000
While the Government has introduced provisions for immediately writing off assets worth up to $5,000, Radisich says this could have been implemented in the upcoming 2010-11 year instead of having to wait until July 1, 2012.
Additionally, Pitcher Partners partner John Brazzale says the measure “doesn’t go far enough”.
Capital Gains Tax
The Henry Review has recommended simplifying capital gains tax by increasing the exemption threshold for collectables and removing the active asset 50% reduction, among other proposals. Cummings said this should be adopted and introduced.
“While the Henry Review has recommended the simplification of CGT, some of the recommendations should have been considered by the Government. “
Raising small business definition threshold
The Henry Review recommends changing the definition of a small business to any entity with turnover less than $5 million, up from the current $2 million. Brazzale says the current definition is not covering as many businesses as possible.
“Given that the SME market is $2 million to $250 million turnover covering 85% of enterprises in Australia, the Government should have at least adopted Henry’s recommendation to increase the threshold in small business entities from $2 million to $5 million.”
The Henry Review has recommended a simplification of the current structure surrounding trusts, including retaining dividend imputation. “The current trust rules should be updated and rewritten to reduce complexity and uncertainty around their application,” it states.