Small business and large corporates would pay the same reduced rate of company tax up to a certain threshold, if a different model of a two-tier company tax system signalled by Treasurer Joe Hockey was adopted.
In the lead up to next month’s budget, which is expected to contain some form of tax relief for all small businesses, Hockey has hinted to Fairfax a two-tier company tax system may include a structure where all businesses, regardless of size, pay a lower rate of tax on profits under a certain threshold, before facing higher rates in other brackets.
The proposed system would work in a similar way to the existing income tax system.
While no definitive amounts have been put forward by Hockey, it has been suggested companies would pay 28.5% tax on profits made on the first $5 million of profit, or whatever threshold set by the government. Any profit made over that threshold would be taxed at the current 30% tax rate.
Kate Carnell, chief executive of the Australian Chamber of Commerce and Industry, this morning told SmartCompany this system would be preferable to a scheme where small businesses pay one rate and larger business pay a higher rate.
“What we would like to see is the corporate tax rate reduction that was promised for everybody,” says Carnell.
“But if it becomes a corporate tax reduction only for SMEs, it is really important to implement that properly, otherwise it will be a red tape nightmare.”
Carnell says if larger corporations are only taxed at a higher rate if they make more than $5 million profit, companies would be encouraged to structure their operations to stay below that threshold.
Pitcher Partners partner Scott Treatt agrees such a system would lead to a greater risk of tax dodging by large companies and would place extra strain on the Australian Tax Office to ensure compliance.
“I think there’s challenges with any structure that uses marginal rates or sliding scales,” says Treatt.
“There becomes an incentive for people to structure operations to pay the least amount of tax they can.”
Carnell says a sliding-scale system would avoid this fate, while being fair to both ends of town.
“It doesn’t mean a different tax rate across the board – only bigger business will pay the higher rate,” she says.
“Big business will predominantly pay 30% and small business will pay 28.5%. We think it is a workable outcome.”
But Carnell says there needs to be more than a corporate tax reduction in the government’s slated small business package.
“The government needs to understand 70% of Australian small business are not incorporated, so this corporate tax reduction doesn’t mean anything to them,” she says.
Treatt agrees the 1.5% tax reduction is not going to make an instant or significant difference to small business, and believes the government should incorporate more incentives for small business beyond company tax.
“If there is a real view to help small business and keep our corporate tax system competitive internationally, then issues around small business, startups and businesses in early stages of growth need to be looked at, such as investing in the intellectual property of businesses to promote the growth of tech in Australia,” he says.