Emerald Chamber of Commerce Inc

Budget 2016: How tax reform could help small business

Louis White - April 27 2016

ANALYSIS

Some of the biggest barriers to the growth of small business in Australia are restrictions placed upon both hiring and firing employees due to out-dated legislation, high personal and company taxes, too many compliance measures and a lack of understanding by federal politicians on what it takes for a small business to function effectively.

While there are tax advantages for small businesses, there are also many areas where the system could be improved.

Research from the Organisation for Economic Co-operation and Development (OECD) taken across the world in 2012 shows that Australia derives a higher proportion of its total taxation revenue from income tax collected from companies and individuals than any country except Denmark.

Tax, tax and more tax

The research revealed that taxes collected on corporate and personal income in Australia represent 58.1 per cent of total tax revenue – the second highest in the world.

"For starters, Australia could lower its tax rate," Sally Higgs, MYOB product manager, says. "This impacts Australia on a global scale."

The federal government reduced the tax rate to 28.5 per cent on July 1 last year for companies earning under $2 million, which affects the vast majority of businesses in Australia.  But the rest of Australian businesses pay 30 per cent, higher than most other Western countries and, in fact, rates six percentage points above the OECD average.

In the United Kingdom the corporate tax rate is 20 per cent, Switzerland 17.92 and Singapore 17, while in Ireland it is very low at 12.5, according to the Trading Economics website.

Creating jobs

"Strengthening our economy is achieved through a simplified and lower taxation system, which creates incentive for entrepreneurs to assume risk on the expectation that the reward is worth it," Trevor Dixon, chairman of the Future of Entrepreneurship, says.

"If we lower taxes in general, have less of them and shift our focus in conversations away from tax to enterprise, we will see a better economy with more jobs, greater consumption and wonderful opportunities ahead for all."

Dixon believes that company tax should be reduced to 20 per cent across the board and individual taxes should be reformed to a single marginal rate with a top rate of 30 per cent while increasing the tax-free threshold to a much higher level and abolish all of the "working" welfare payments.

Increasing tax revenue

"To ensure that the overall taxation revenue is maintained an increase in the GST would be necessary," Dixon says. "On that basis, entrepreneurs who take their 'rewards' are captured in the tax take through their consumption spending or otherwise invest in their enterprises to grow them to avoid that tax.

The Federal Government has to embrace innovation to simplify its tax system

"Which means that they cannot avoid contributing to society, they either pay taxes or create economic growth."

GST compliance

Another burden upon small businesses is the quarterly GST compliance, which is not only very time consuming but also unnecessary.

"SMEs spend 84 hours or two weeks a year just collecting GST for the government," Higgs says. "It's a huge amount of work for SMEs to go through every invoice they receive and working out every single line item that attracts GST or not.

"We need to remove the need to assign GST-free categories for businesses or those with annual revenue below $2 million and if we implemented a New Zealand-style, simplified GST, small and medium businesses would save over $7 billion a year."

MYOB estimate that GST compliance costs Australian businesses more than $13.7 billion a year, that's $6778 annually for each of Australia's two million SMEs.

"GST costs in Australia are double that of New Zealand because of the complexity of exemptions coupled with the amount of over reporting needed for each exempt item," Higgs says.

"Even in the UK, purchases for business purposes are not required to pay source, whereas in Australia you pay and then claim it back, creating a lot of overhead."

The Singapore affect

When it comes to "doing business", it is hard to go past the way Singapore has embraced business measures.

The World Bank "doing business" report states that Singapore is the easiest country in the world in which to start and run a business.

"The tiny island nation has dominated this list for the past six years," says Carolyn Dorrian, principal solicitor and owner of Dorrian & Co. "It takes just three days to start a business in Singapore, according to the report, which is lower than the OECD average of five days and significantly lower than Asia's average of nearly 30 days."

Australia didn't even rank in the top 20 countries for ease of doing business.

"Compliance costs are still high and recording systems are still archaic in Australia and the federal government has to embrace innovation to simplify its tax system," Dorrian says.

Five simple ways for small business to make their tax life easier

1) Manage your business through accrual reporting, file on a cash basis if that's better for cash flow.

2) Deposit the GST obligation (10%) and your tax proportion (30%) from every invoice received into an interest accrual account or an offset account, don't spend it.

3) Seek out an accountant who understands your business and can provide insight into your growth rather than one who merely files your compliance reports.

4) Be organised and do things early. Putting yourself under pressure just before EOFY may increase risks, mistakes and risk business performance and efficiency. Financial data is important for decision making to business owners, directors and management staff.

5) Follow up and urgently review all your debtors. Get a collection agent or engage a lawyer to draft a letter of demand for example prior to starting your end of financial year lodgement.

This story has been brought to you by the Emerald Chamber of Commerce Inc.

(Ph: 07 4982 3444)