Tax reform for small business

The recent Budget has stimulated a lively debate on taxation reform. The tax measures in the Budget have many opponents on one side and on the other side a distinctly smaller number of supporters. It was "ever thus" with taxation.

Part of the problem has been the dearth of any meaningful reform for over a decade, indeed since 2001. And clearly while many of the recent tax measures can be argued for in the case of repairing the Budget's bottom line, or fulfilling promises like abolishing the carbon tax, I will not insult the reader by claiming they are the be-all-and-end-all of tax reform. Some will argue that certain measures are actually anti-reform.

There wasn't any sustained attempt at tax reform in the latter half of the Howard Government – not surprisingly due to the near (political) death experience of that Government when it courageously took massive tax reform, including the introduction of a GST, to the electorate in 1998.

Equally Wayne Swan was one of the most quixotic Treasurers in Australia's history when it came to taxation. His claim that the carbon tax was "economic reform" defied logic and the treatment of the review chaired by then Treasury Secretary Ken Henry in 2009 was flakey to say the least. I actually didn't agree with quite a few of that review's recommendations, so I am not unhappy it was largely ditched.

And while Swan would argue that one of the three recommendations that was attempted, the mining super profits tax, was a "reform" my view is that it was both bad in theory and in practice. It obviously also precipitated the demise of Kevin Rudd in his first incarnation as Prime Minister. Clearly whatever the merits of any particular proposal, significant tax change is fraught.

One area of the economy that is crying out for taxation reform is small business. The Australian Chamber of Commerce and Industry (ACCI) pre-election survey for 2013 found that more than three-quarters of businesses expressed major and moderate concerns with company tax(79.7 per cent), compulsory superannuation levy(75.3 per cent) and personal income tax (78.1 per cent). Further small and medium-sized firms rated the superannuation levy as one of their top five concerns, while large firms placed it well down in their list of concerns.

As the ACCI commented "The concern of SMEs is understandable as the superannuation levy is one of the major on-costs for hiring workers and this on-cost will increase further following the increase of the levy from the current 9 to 12 per cent over the coming years". ACCI asked businesses which taxation areas needed further reform. It found that while small business ranked company tax reductionsand personal income tax reductionsas their first and second tax reform priority respectively; medium and large businesses rated payroll tax reductions and company tax reductionsas their first and second reform priority.

The recent Budget delivered on two key Coalition election promises: to delay the increase in the super levy and to cut company tax by 1.5 per cent to 28.5 percent from 1 July 2015. They are very welcome. In my view we should be looking to go further.

Firstly on super I think there is strong case for even a longer suspension in an increase. I also think we should be reviewing international experience and look at having a differential (lower) company tax rate for small business. Over the years this has been implemented in a number of countries including the UK, the USA, France, Japan, and South Korea.

I also think that the Rudd-Gillard Government's abolition of the small business entrepreneurs' tax offset should be reversed. That benefit was introduced in the 2005 Costello Budget and had little time to be tested. Small business taxpayers with a turnover of $50,000 or less were allowed a tax offset of 25 percent on their taxable income.

Over recent years small business has been hit for six by the regulatory burdens of the previous government. The drastic employment consequences have been startling. The number of employing small businesses declined by 3,000. The net result has been that over the last six years 412,000 jobs were lost in small business. In fact the small business share of the private sector workforce went from 53% to 43%.

For those who don't like the tax measures in the recent Budget can I urge them to take part in the community consultation on taxation reform. At the election the Coalition promised that we would review the taxation system within two years of coming to government and prepare a comprehensive White Paper on Tax Reform. My view is that the review should start immediately, maximising the opportunity for selling any tax reforms proposals. And small business should be a key focus of the review.