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Submission No. 6 Back to full list of submissions
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Council Of Small Business Organisations

of Australia Ltd

Response to

"A Strong Foundation"

Discussion Paper

REVIEW OF BUSINESS TAXATION

Council of Small Business Organisations of Australia

BUSINESS TAX REFORM

 

Introduction

The Council Of Small Business Organisations of Australia Ltd is a peak body of small business organisations with member associates throughout Australia. These members themselves have state based member organisations which link to a network of individual small firm memberships of around 150,000. COSBOA primary purpose is to represent the broad interests of all small businesses across a range of areas mostly at the federal level.

Preamble

Overall the first discussion paper provides a useful starting point for the discussion on wide-scale business taxation reform. As always the real test will be in the outcome and the detail of that outcome. in commenting on the paper we have sought to keep our comments brief and only on the key issues from a small business perspective.

Whilst this response covers a range of issues the key points being made are that:

  • There must be a focus on employment as a key objective in a new taxation system;
  • Taxation must not become due for payment until the income to which it relates has actually been received.
  • Costs of complying with a new system must be reduced and small firms must be fully compensated for their costs of complying, particularly employment related costs;
  • All business expenditure must be fully deductible either immediately or over time;
  • New taxation policy proposals must be subject to industry consultation, including,in particular, small business, before implementation.

Broad Design Principles

The broad design principles of optimising economic growth, ensuring equity and facilitating simplification enunciated in the paper are generally supported as appropriate to provide the high level guidance needed to develop a business tax system. However, it is COSBOA’s view that more emphasis needs to be given in some areas to avoid narrow thinking that could result in a system that distorts business decision making and further compounds the difficulties small firms have in complying with the current system. Areas and points of emphasis in relation to each of the high level principles are set out and discussed below.

Optimising Economic Growth

Economic growth is not simply a focus on the bottom line. Sound economic growth should result in improvements in a range of indicators that will provide the springboard for long term growth and well-being on both economic and social planes. The level of unemployment is a key economic indicator and reflects the health of the economy and society generally. It is COSBOA’s strong view that specific emphasis must be placed on employment growth.

In connection with employment it is noted that recent trends show that large businesses are reducing employment levels in favour of capital intensive production methods whilst small firms can provide the source of employment growth in the right environment. In this context a key feature of a tax system must be that it not contain disincentives to employ or be biased in favour of capital intense means of production.

The current system is, in COSBOA’s view, biased towards capital intense industry. Indeed a simple examination of the selected business tax concessions on page 23 of the paper shows how current concessions are biased towards investment and capital intensive activities; not one of the concessions listed would of themselves encourage employment. Whilst no doubt investment in new business ventures will generally create employment there is nothing that encourages investment of this nature.

To add further weight to this view an examination of recently published financial data of large companies in Australia shows that whilst the assets of the top 11 companies increased by over 10%, the level of employment by them reduced by 3.5%. This indicates the effect of economic rationalistic thinking that is so prevalent and driving both public and private sector decision making.

Economic rationalist thinking has been at the forefront of economic policies for the past decade or more and during this time we have seen a growing unemployment problem while capital intensive businesses have thrived. We have watched as manufacturing industry has stagnated or gone off-shore and the number of manufacturing jobs declined. Whilst the size of the services sector has increased to take up some of the slack it has not been enough.

Small business has been regarded as the ‘engine room’ of growth in the Australian economy for many years. Small business makes up of the order of 98% of employers in the Australian economy and accounts for 55% of the private sector and generates 40% of GDP. As large business is increasingly using capital intensive methods to achieve profits, small firms are clearly the way that the employment void being created by large business should be encouraged.

Ensuring Equity

There are several specific points that need to be drawn out in this area which affect small firms in particular. These are:

  • Included in the design of both sales tax and provisional tax were features that resulted in tax becoming payable before the money relating to that tax had actually been received by a business. It is evident that under GST and PAYG proposals similar situations will occur. Small firms are particularly hard hit by these arrangements because they often have to borrow money to pay tax on profits or income that has not yet been realised. It is COSBOA’s very strong view that tax should not be paid until the income to which it relates has actually been received.
  • There are strong perceptions in the community that the current income tax system is inequitable in that it favours large business and high wealth individuals over others in the community. Clearly the complex nature of the current system allows those who can afford the best advice to pay less tax than others who cannot avail themselves of such advice.

Amongst business people there is a similar perception that large businesses have a significant advantage over small firms. A simple analysis of taxation statistics for the 1995-96 income year lends credence to this view. For example, on a total income of large business of $820 billion, $13.1 billion or 1.6% was paid in tax. Those businesses with total income less than $10 million by comparison had total business income of $409 billion and a tax payable of $17.9 billion or 6.8%. It is significant to note that whilst most of the large business income was derived through companies that less than 20% of small business was derived by companies and trusts.

Whilst the broad notion of taxing similar businesses in the same way and at the same level regardless of entity type sounds fine there are concerns that the concept must be carefully analysed to ensure that unintended consequences with dire effects on business and individuals would not occur. For instance, taxing a partnership with ten partners at the same rate as a sole trader earning the same income would be clearly inequitable.

  • Legitimate business expenditure is frequently not allowable as deductible due to the distinction between capital and income related expenditure. The paper cites an example of architect fees for alterations that do not proceed. More frequently encountered examples occur in relation to leasehold expenditure that small firms incur in setting up their premises. The expenditure is clearly incurred in conducting the business but because of the capital/income distinction it is not allowable as a write-off against income. COSBOA is strongly of the view that all business related expenditure be allowed either immediately or over time.
  • Another source of inequity in the current system is its use to achieve non-taxation policy objectives. Many tax incentives or tax expenditures frequently serve to distort business decisions. COSBOA believes that the tax system generally should not be used as the tool to administer other policy programs unless it can be clearly shown that such action will not interfere with normal business decision making.

Facilitating simplification

It is COSBOA’s strong view that the principle of facilitating simplification must have a strong focus on reducing the costs associated with complying with taxation laws and increasing the certainty of the law under which the tax system operates. Further it is COSBOA’s strong view that simplification of tax laws would be best supported by a system that requires full compensation for the costs incurred by business in this area.

Recent surveys (eg Wallschultzky, ATAX) have clearly shown that small firms are disproportionately burdened with tax compliance costs. By contrast large firms make money as a result of the taxation system. The ATAX study undertaken for the Commissioner of Taxation quantified the costs of complying with taxation laws by small and medium firms at $1,200 and around $5,000 respectively, whilst large businesses benefited by an average of $30,000. This situation must be reversed.

Another issue related to the costs of complying with taxation laws is the increased incidence of the transfer of government work to employers. Whilst for the last decade governments have espoused the notion of reducing redtape and compliance costs the reality is that taxation compliance costs have increased during this time. The taxation system is constantly being used as a vehicle to implement policy in other areas, for instance, superannuation, health, social welfare policies, etc. All of these things come at a cost which increasingly is falling on employers. Governments have increasingly shifted costs from the government to the private sector to support their policies. The implementation of policies in this way disguises the real cost of those policies and the private sector is bearing the burden of governmental decisions. We would argue that by shifting costs in this manner the government is acting contrary to its own competition policy. COSBOA’s conclusion is that government should fully accept the costs it has transferred to the private sector

It is COSBOA’s strong view that compliance costs must be reduced and that small firms must be fully compensated for the work they perform in complying with taxation laws, particularly those relating to employment costs.

In saying this it should be borne in mind particularly that small firms bear the brunt of these government imposed administrative tasks in that they generally are not able to afford the automated systems that would minimise the time and inconvenience of doing the work. To put a fine point on this issue, it should be noted that the average number of employees in Australia per firm is of the order of seven and small employers must familiarise themselves with the full range of responsibilities just as much as large ones.

Turning now to the issues of certainty and complexity. It is COSBOA’s view that the reform of business tax arrangements in Australia must result in a reduction in the level of the complexity in the taxation system and increase the level of certainty under the law. This must be reinforced by quick dispute resolution mechanisms. Current dispute resolution arrangements leave a great deal of uncertainty and cost that affects the fairness of the whole system.

COSBOA welcomes the government’s zeal for taxation reform and the concept of a broad based and limited exemption flat rate consumption tax. However, it is disappointed on two fronts. Firstly, the existing income tax system with all its uncertainties and complexities has remained and whilst this Review is being undertaken, business still operates in an environment where it deals with the current system. Secondly, the GST arrangements announced in Parliament on 2 December are quite a deal more complex than the pre-election promises would have business believe. What we are seeing is the elimination of a complex sales tax regime that applied to 75,000 businesses being replaced by a not-so-simple GST that applies to 1,000,000 businesses.

Consultation Processes

The discussion paper illustrates the high level of consultation that takes place in the current arrangements. This high level of consultation for the most part takes place after policies have been announced and generally involves dealing with implementation issues and problem situations. COSBOA is of the strong view that effective consultation requires that those likely to be affected most by new policies be involved early in the shaping of the policy so that problems and unintended consequences are more likely avoided.

Comprehensive Taxation

The discussion paper explores the idea of comprehensive taxation. This would have the result of taxing unrealised gains, causing valuation difficulties and generally being seen to be unfair. COSBOA acknowledges that in pure economic terms such models need to be explored but it could not support this as the basis of a future tax system.

Conversion Costs

An issue not canvassed in the paper is the cost to be borne by business in converting from one taxation system to a new one. Converting to a new taxation system is likely to be a costly, time-consuming and complex activity. It is essential that sufficient time, assistance and compensation be provided for small firms to get their systems in order and familiarise themselves with all new requirements.

 

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