It’s time to be bold: Why Australia’s mid-market businesses need tax reform

It’s time to be bold: Why Australia’s mid-market businesses need tax reform

 

The federal government’s Mid-Year Economic and Fiscal Outlook (MYEFO) is likely to confirm the federal budget deficit is increasing. Recent government commentary and the level of economic activity since the May budget indicates there is no good news on the deficit front.

With Council of Australian Government talks continuing to demonstrate that meaningful structural tax reform in Australia is difficult, to say the least, the government needs to explore all possible avenues to reduce the current complexity and costs of compliance associated with the current tax system. Federal and state governments may be stalled on GST reform but tax reform can encompass more than the GST.

Over the past several years, Australian economic trends have been towards increasing deficits and lower than hoped for economic growth. This only serves to emphasise the need for structural change.

Australia cannot continue to be the sustainable and significant economy it seeks to be by relying on resources and agriculture to do the heavy lifting when it comes to underpinning economic growth. Without investment into other sectors of the economy, Australia will struggle to maintain the growth and employment opportunities we need to sustain our lifestyles.

 

Don’t neglect the mid-market

 

The government’s recent innovation statement signals there is a good level of support for the evolution of the business community to create new ideas and add value through entrepreneurship.

Many of the initiatives announced last week will assist new businesses to gain startup funding and establish themselves in the marketplace, grow, and contribute to the economy.

However, the government should not neglect existing businesses, especially in the middle market, when considering how to facilitate a more effective business environment.

Greater thought needs to be given to how we can evolve the existing business community; it is already established, knows how to operate and only needs further encouragement having already survived the initial riskiest startup phase.

The middle market represents significant wealth creation, contributing at least $500 billion to the economy each year. It also employs approximately a quarter of the workforce and accordingly is a key contributor to employment and growth. Government policy should be directed to igniting this engine room so Australia can deliver on everyone’s aspirations and we can continue to grow and enjoy our great way of life.

 

Simpler and fairer tax is needed

 

The challenge is obviously in how to make this possible. Although targeted incentive and development programs are good, there are a broader structural challenges in the economy that needed to be addressed.

Clearly tax reform is on the agenda for the coming 12 months, both pre- and post-election, and Pitcher Partners believes there is significant opportunity to introduce wide scale simplification and fairer taxation for the middle market.

If the government really wants to give a boost to business, structural reform should include working with the states to remove inhibitors of business growth, such as payroll tax.

The business community does not resent paying fair tax on profits earned but the imposition of a punitive tax on employing people, rather than on the outcomes of employment, can only be counterproductive to encouraging growth in both jobs and in the economy.

Obviously the federal government would have its challenges dealing with the states on such a change. But it’s time to be bold.

Over the next 12 months, as tax reform moves front and centre of the federal government’s agenda, it’s time to engage the states in a conversation about removing payroll tax and improving middle market businesses’ capacity to provide employment.

The middle market also needs further assistance with access to capital.

The government recently announced its intention to facilitate easier crowdsourced financing but the proposals are limited to small businesses. This simplification should be extended to the middle market. Businesses in the middle market are constrained in their access to debt-based finance and the limited resources of many private business owners limit equity funding.

The government should be applauded for its recent establishment of various international trade agreements with significant economies around the world. The onus is to some extent now on business to invest internationally and seek the rewards of our new free trade agreements but government can always do more to assist businesses with making this transition.

This could include facilitating greater education for middle market participants about international investment opportunities and enhancing existing support structures through Austrade to accelerate middle market businesses’ access to overseas markets.

It is unlikely that the government will announce any significant action to stem the burgeoning deficit and address structural barriers to economic growth in December.

And while many of the influences that affect the deficit, such as falling commodity prices, are outside of their control, we hope to see a more meaningful conversation arising over reducing red tape, costs and complexity for the middle market in the lead up to next May’s budget.

 

Mark Harrison is a partner at Pitcher Partners. 

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