By Mark Morris
Fresh tax incentives that either cut red tape or improve cash flow for small businesses are sorely lacking when it comes to policies put forward by the major political parties.
Neither the Turnbull government or the Labor party are proposing any new substantial measures to simplify the income tax regime for small business.
However, there are three tax policy ideas that could help revitalise the small business sector, which should be considered in the framing of the 2016-17 federal budget or in developing the small business taxation framework for the next elected government.
1. Increase eligibility to be a small business entity to $3 million
A small business entity is subject to a raft of tax concessions where the entity’s annual “aggregated turnover” is less than $2 million. Such concessions include accelerated tax depreciation relief and a lower company tax rate of 28.5%.
But there is a strong case to argue the threshold should be increased to at least $3 million, to both reflect inflation and to bring more entities within the small business entity framework.
Last year former Treasurer Joe Hockey flagged this was the next logical step but said it was subject to budgetary constraints.
Following Cabinet Secretary Arthur Sinodinos’ recent comments, it appears the government is now considering the merits of some type of company tax relief.
This could be funded by tightening superannuation tax breaks for high income earners by taxing superannuation contributions as income in the hands of individuals at their marginal tax rates, albeit subject to a 15% refundable tax offset rather than have all superannuation contributions taxed at a flat 15% rate.
Deloitte recently championed a variant of this proposal in its report Shedding light on the debate – Myth busting tax reform, suggesting the approach could make a dividend of around $6 billion in the 2016-17 year.
If this change was made, some corporate tax relief for small to medium sized companies would be affordable.
2. Redesign Division 7A
As any tax adviser servicing the SME market will tell you, the most problematic set of provisions affecting small and medium-sized taxpayers are those in Division 7A.
Division 7A was introduced to automatically treat any payment, loan or debt forgiveness by a private company to a shareholder or associate as an unfranked deemed dividend, paid out of the company’s profits.
These provisions have become inordinately complex over time, and the biggest problem area is the application of Division 7A where loans have been made by a private company to a shareholder or associate.
The Board of Taxation’s comprehensive report in November 2014 set out how the loan rules could be simplified, proposing new criteria that would allow greater flexibility in loan arrangements while cracking down on disguised distributions of profits to shareholders and associates.
The report also proposed that loans owed to private companies by associated trusts in the form of unpaid trust distributions could be taken outside the scope of Division 7A, which would relieve such trusts from having to raid their working capital or sell assets.
Regrettably, the recommendations of this review were subsumed into the federal government’s white paper on tax reform, which has now been consigned to history – even though Division 7A reform is still chronically required.
Implementing such reform would help both business and their tax advisors comply with tax laws and improve productivity.
3. Simplify the small business CGT concessions
Ask anyone who advises on the small business capital gains tax (CGT) concessions and they will invariably tell you accessing them can often be like winning a lottery.
The most contentious aspect of the concessions is the $6 million maximum net asset value test, which must be met if the entity cannot otherwise meet the $2 million aggregated turnover test.
Essentially, the asset test involves determining the market value of all CGT assets and any related connected entities reduced by liabilities.
The test is counterintuitive because assets that are outside the scope of the CGT rules, such as pre-CGT acquired assets, depreciating assets and trading stock, are included.
But its worst problem is determining the market value of CGT assets just before their sale, as there are often disputes between the Australian Tax Office and taxpayers regarding the valuation at that time.
As an alternative, the test could be dumped and replaced by a higher aggregated turnover test, calculated according to objective and transparent criteria.
Given the need to urgently simplify our tax system for small business, it is disappointing that there is so much chatter about leadership, tax reform and a more agile economy without any real substantive tax policies for SMEs being advanced or sensibly debated.
Mark Morris is a professor of practice, taxation, at La Trobe University.