Kai Swoboda
The 2015–16 Budget includes a number of tax measures that
apply specifically to small businesses—defined in the tax system as an entity
(however structured) that carried on a business with an aggregate annual
turnover of less than $2 million—that will reduce tax payable.[1]
The combined impact of these tax-related measures over the forward estimates is
to reduce tax revenue by over $5 billion.[2]
Cut in tax rate on small business profits
Small businesses, whether incorporated or unincorporated, will
pay less tax on their profits from 1 July 2015. For incorporated small
businesses—estimated to account for 36% of small businesses—this will be
implemented by a reduction in the company tax rate from 30% to 28.5%. For small
businesses that are unincorporated, this will be implemented by a 5% tax
offset (equivalent to the reduction in tax rate for incorporated entities), but
this is to be capped at $1,000 per individual for each income year.[3]
The proposal to cut the company tax rate for small business
has evolved from a proposal by the Rudd and Gillard Governments to bring
forward by one year for small business a general cut in the company tax rate
(with this measure linked to revenue from the Minerals Resource Rent Tax).[4]
A favourable regime for small business was also an outcome of the Coalition’s
policy to lower the company tax rate and to fund the (now dropped) paid
parental leave scheme with an equivalent levy on big business—effectively
providing for a tax cut for smaller companies only.[5]
The favourable tax treatment of small business can be
justified on efficiency grounds if there is evidence that they provide
spillover (external) effects to the rest of the economy that are not fully
captured by these entities.[6] However, special tax
arrangements may distort choices including the structure of business
organisation and commercial decisions about forms of expenditure. They may also
result in economic inefficiency if they interfere with the market and result in
the allocation of resources to small, less efficient, firms rather than to
larger, more efficient, ones.[7]
One distortion associated with the turnover-based small
business threshold is a bias towards high margin activities.[8]
For example, a business that sells large volumes of goods to generate a profit (such
as a retailer) may have a much greater turnover than a business which delivers
an expensive professional service to generate the same level of profit. The
application of a lower tax rate to eligible small businesses may reinforce this
bias and also be a disincentive to accelerating business growth as the business
approaches the $2 million aggregate turnover threshold.[9]
A lower tax rate for smaller companies was considered in a
tax review (the Asprey
review) conducted in the early 1970s.[10] The Asprey review did not
support such an approach, noting that ‘one should not lightly introduce a new
element of non-neutrality into the company tax system’.[11]
Neither of the two major tax reviews since the Asprey review—the Ralph review (1999) and the Henry
review (2009)—canvassed the issue of a different tax rate for small
business.[12] However, this issue
could be examined in the current tax review. The discussion
paper for the review asked: ‘What other mechanisms (such as a single lower
tax rate, improved technology deployment or other non-tax mechanisms) could
assist small businesses to engage with the tax system while decreasing
compliance and complexity costs?’[13]
That said, a lower tax regime for small business is already part
of the corporate tax regime in a number of OECD countries, including Canada,
France and Japan.[14] The OECD noted in a 2009
review of taxation arrangements for small business that ‘[t]he rate reduction
may be targeted at small business income in a number of ways (in some systems
only to firms satisfying a small business test, in other systems available to [small
and medium-sized enterprises] and large firms but only up to some taxable
profit limit), together possibly with other targeting criteria (e.g. profits
from targeted business activities)’.[15]
Accelerated depreciation
Small businesses will also be entitled to an increase in the
threshold for the instant deductibility of assets from $1,000 to $20,000. This
measure will apply to assets acquired and installed ready for use between
7.30 pm (AEST) 12 May 2015 and 30 June 2017.[16]
As part of this change, assets valued at $20,000 or more can utilise
existing simplified depreciation arrangements and the ‘lock out’ regime
preventing a small business re-entering the simplified depreciation will be
suspended.
The increase in the threshold to $20,000 reverses the recent
lowering of the threshold from 1 January 2014 from $6,500 to $1,000 as
part of the repeal of measures that were linked by the former Government to the
implementation of the Minerals Resource Rent Tax.[17]
There is a broad literature on the economic impacts of
accelerated depreciation, which has examined links between provisions for accelerated
depreciation with economic growth, investment and innovation, with mixed views
about their impact.[18] This literature includes
an analysis of a specific period of ‘bonus’ depreciation for certain assets
provided to firms in the US in the early 2000s that observed ‘a substantial
stimulative impact on investment in capital goods that benefited most from
bonus depreciation’.[19]
Other tax changes for small
business
Several other tax changes also apply to small business:
-
from 1 April 2016, small businesses will be entitled to a
fringe benefits tax (FBT) exemption if they provide employees with one or more
qualifying work-related portable electronic devices, even where the items have
substantially similar functions.[20]
-
from 1 July 2016, small businesses will be able to change
their legal structure without attracting a capital gains tax liability at that
point.[21]
-
from 1 July 2015, small businesses will be able to
immediately deduct a range of professional expenses associated with starting a
new business, such as professional, legal and accounting advice.[22]
[1].
The definition used for a small business in the tax law uses an
aggregate annual turnover of less than $2 million (Income
Tax Assessment Act 1997, Section 328-110). Unless specified, the term
‘small business’ in this article refers to this definition.
[2].
Australian Government, Budget
measures: budget paper no. 2: 2015–16, pp. 18–20.
[3].
Australian Bureau of Statistics (ABS), Counts
of Australian Businesses, including Entries and Exits, Jun 2010 to Jun 2014,
cat. no. 8165.0, ABS, Canberra, March 2015, p. 19; Budget
measures: budget paper no. 2: 2015–16, op. cit., pp. 19–20.
[4].
K Rudd (Prime Minister of Australia), Stronger,
fairer, simpler: a tax plan for our future, media release, 2 May
2010; J Gillard (Prime Minister of Australia), W Swan (Treasurer) and M
Ferguson (Minister for Resources and Energy), Breakthrough
agreement with industry on improvements to resources taxation, joint media
release, 2 July 2010.
[5].
Liberal Party of Australia, The
Coalition’s policy for paid parental leave, Coalition policy document,
Election 2013, September 2013.
[6].
F Chittenden and B Sloan, ‘Taxation and public policy towards small
firms: a review’, Australian Tax Forum, 22(4), p. 31.
[7].
J Freedman, ‘Reforming
the Business Tax System: Does Size Matter?: Fundamental Issues in Small
Business Taxation’, in C Evans and R Kever (eds), Australian business tax
reform in prospect and retrospect, 2009, pp. 170–171.
[8].
Taxpayers Alliance, ‘Preliminary #2015 budget thoughts: More tax, more spending more
deficits’, Taxpayers Alliance website.
[9].
BDO, Federal
budget 2015: Are we still on track?, p. 3.
[10].
Taxation Review Committee (Asprey review), Full
report, 31 January 1975.
[11].
Asprey review, op. cit., p. 242.
[12].
Australian Government, Review of Business Taxation (Ralph review), A tax system redesigned: More
certain, equitable and durable, July 1999; Australian Government,
Australia’s future tax system (Henry review), Australia’s
future tax system: Report to the Treasurer, Part 1 Overview, December
2009. These reviews did address some small business tax issues.
[13].
Australian Government, Rethink:
Tax discussion paper, March 2015, p. 120.
[14].
OECD, ‘Tax
database: Table II.2. Targeted corporate income tax rates’, OECD website.
[15].
OECD, Taxation
of SMEs: Key issues and policy considerations, OECD Tax Policy Studies
No. 18, 2009.
[16].
Budget measures: budget paper no. 2: 2015–16, 2015, op. cit., p. 19.
[17].
Australian Taxation Office, ‘Instant
asset write-off and simplified depreciation’, ATO website.
[18].
See for example, Y Margalioth, ‘Not
a panacea for economic growth’, Virginia Tax Review, 26(3), 2007; M
Benge, ‘Should
Depreciation Allowances be Accelerated?’, Policy magazine, Centre
for Independent Studies, 9(2), 1993.
[19].
C House and M Shapiro, ‘Temporary
Investment Tax Incentives: Theory with Evidence from Bonus Depreciation’, The
American Economic Review, 98(3), 2008, p. 738.
[20].
Budget measures: budget paper no. 2: 2015–16, op. cit., p. 18.
[21].
Ibid.
[22].
Ibid. While the description of this measure does not refer to the
$2 million small entity, a separate description of this measure includes a
reference to this threshold (Business.gov.au, ‘Jobs
and Small Business package’, Business.gov.au website).
All online articles accessed May 2015.
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