Small business company tax rate changes

Budget Review 2016–17 Index

Les Nielson

Proposed changes

Currently the corporate tax rates are 30 per cent for companies with an annual aggregated turnover[1] of more than $2 million and 28.5 per cent for companies with an annual aggregated turnover below this figure.[2]

From 1 July 2016, the government proposes to change these rates to:

  • 30 per cent for companies with an annual aggregated turnover greater than $10 million (but this rate is scheduled to fall to 25 percent over 10 years)[3]; and
  • 27.5 per cent for companies with an annual aggregated turnover of less than $10 million.[4]

 Number of companies possibly affected

The focus of these changes is squarely on small and medium enterprises (SMEs). It is estimated that on the basis of the 2013–14 taxation statistics about 792,000 companies could benefit from the proposed change to the small company tax rate.[5] These companies comprised about 91 per cent of all companies and yielded about 22 per cent of the total company tax collected in 2013–14. About 734,000 companies were subject, in 2013–14, to the 28.5 per cent rate.[6]

International comparison of company tax rates

Table 1 provides both the overall corporate tax rate and the small business tax rates for selected countries who are members of the Organisation for Economic Cooperation and Development (OECD) and that have a differential corporate tax rate regime, and also for Singapore, which is not an OECD member.

Table 1: Main and small business corporate tax rates, 2015 (%)

Country

Main Rate

Small Business Rate[7]

Australia

30

28.5

Belgium

33.99

24.98

Canada

26.3

15.19

France

34.43

15

Hungary

19

10

Japan

32.11

21.42

Luxembourg

29.22

28.15

Singapore

17

8.5[8]

Spain

28

25

United States

39

19.92

Sources: OECD Tax Database and Singapore government[9]

Table 1 does not give a full picture of corporate tax rates. For example, Luxembourg plans to reduce its combined corporate tax rate to 19 percent in 2017 and further reductions thereafter.[10] In addition, Singapore, Luxembourg and Ireland have special tax rates applying to companies in particular circumstances.

Arguments for and against

There are a number of benefits from promoting the SME sector:

SMEs are crucial to the social and economic health of local, regional and national communities. As the mining boom naturally evolves from investment to production, SMEs will increasingly drive future economic growth. Their adaptability and flexibility allows the exploitation of niche markets and embrace of new technology. SMEs can enter and exit markets more nimbly in response to fluctuations of price and demand, thereby boosting competition, increasing choice, delivering value and forcing existing firms to improve.[11]

There are several arguments in favour of concessional tax treatment for small business.

A 2009 review by the OECD noted that the main arguments in favour of this concessional treatment were:

  • positive externalities (such as higher employment, faster growth, higher rates of innovation and high rates of involvement in export markets, greater economic development in regional areas[12]) whereby small businesses generate benefits greater than those accruing to private investors
  • the need to overcome capital market imperfections resulting from less information about small companies being held by lenders, compared to the information being held on larger company borrowers, as well as small company borrowers not having as much information about sources of finance compared to large company borrowers (information asymmetries)[13]; and
  • to overcome impediments to small business creation and growth created by ‘normal’ tax arrangements that apply to small businesses. These include the relatively high compliance burden, taxes on the sale or inheritance of small businesses, and limited loss offsets that discourage risk taking.[14]

The arguments against preferential tax treatment for small businesses include:

  • uncertainties about the extent to which positive spill-over benefits are particularly associated with small businesses
  • whether asymmetric information problems noted above may in some cases result in overinvestment, rather than underinvestment
  • practical implementation of such measures, which may lead to efficiency losses (through inadequate targeting of government assistance measures) and
  • whether a tax intervention is the best way to achieve a certain outcome.[15]

The application of differential company tax rates is a temporary measure, with increasing numbers of companies being subject to the 27.5 per cent tax rate up to 2024–25, after which all companies will have the same tax rate applied.[16]



[1].          A company’s aggregated turnover is defined as annual turnover of the business plus the annual turnover of an associated or affiliated business. Section 328–120 of the Income Tax Assessment Act 1997 provides this definition: ‘annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business’.

[2].          The 28.5 per cent rate was introduced by the Tax Laws Amendment (Small Business Measures No. 1) Act 2015. For background, see K Swoboda, Tax Laws Amendment (Small Business Measures No. 1) Bill 2015, Bills digest, 116, 2014–15, Parliamentary Library, Canberra, 2015.

[3].          See L Nielson, Corporate Tax Rate Reductions: Large Business, Budget review 2016-17.

[4].          Australian Government, Budget measures: budget paper no. 2: 2016–17, 2016, p.41.

[5].          Australian Taxation Office, Taxation statistics 2013–14, 2016, Summary Table 5.13.

[6].          Australian Taxation Office, Taxation statistics 2013–14, 2016, Summary Table 5.13.

[7]           Note that the criteria for ‘small business’ varies across jurisdictions and can include staff levels, capital, turnover and taxable income measures.

[8].          The first S$100,000 profit is tax free. The 8.5 per cent applies to profits between S$100,001 and S$300,000.

[9].          OECD Tax Database, Corporate Tax Rates; Singapore Government, Inland Revenue Service, Corporate Tax Rates, Corporate Income Tax Rebates, Tax Exemption Schemes and SME Cash Grant, website. In this table both the main corporate tax rate and the small business tax rate are the overall rate imposed by both the central and sub-central governments.

[10].       PriceWaterhouseCoopers (PWC), Luxembourg Government announces 2017 tax changes, 29 February 2016, p. 1.

[11].       B Billson (Minister for Small Business), Address to the G20 Agenda for Growth: Opportunities for small and medium enterprises conference, Melbourne, 20 June 2014.

[12].      A Tan, P Brewer, P Liesch, and L Coote, ‘Commitment to internationalisation : an extension of the internationalisation process model’ in Institutions, organisations and markets: new international business research opportunities, University of Auckland, New Zealand, 2014; J Freeman, C Styles and M Lawley, ‘Does firm location make a difference to the export performance of SMEs?’, International Marketing Review, 29 (1), 2012, p. 88; C Graves and YG Shan, ‘An empirical analysis of the effect of internationalization on the performance of unlisted family and nonfamily firms in Australia’[abstract], Family Business Review, August 2014, pp. 1-19; V Le and A Valadkhani, ‘Are exporting manufacturing SMEs more efficient than non-exporting ones? Evidence from Australia's business longitudinal database, [abstract], Economic Analysis and Policy, 44 (3), 2014, pp. 310-317; Export Finance and Insurance Corporation (Efic), SME Exporter Index, September 2014, p. 17.

[13].       OECD, Taxation of SMEs: key issues and policy considerations, OECD Tax Policy Studies, 18, 2009, p. 84 and pp. 94–95.

[14].       Ibid.

[15].       Ibid.

[16].       See, L Nielson, Corporate Tax Rate Reductions: Large Business, Budget review 2016-17.

 

All online articles accessed May 2016. 

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