Bills Digest no. 116 2014–15
PDF version [706KB]
WARNING: This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Kai Swoboda
Economics Section
10 June 2015
Contents
Purpose
of the Bill
Background
Committee consideration
Statement of Compatibility with Human Rights
Policy position of non-government parties/independents
Position of major interest groups
Financial implications
Key provisions
Key issue—a two-tier company tax rate
Other provisions
Concluding comments
Date introduced: 28
May 2015
House: House of
Representatives
Portfolio: Treasury
Commencement: Royal
Assent; except for Division 2 of Part 2 in Schedule 1 which commences
immediately after the commencement of Division 1 of Part 2 in Schedule 1 of the
Tax and Superannuation Laws Amendment (2015 Measures No. 1) Act 2015.
Links: The links to the Bill,
its Explanatory Memorandum and second reading speech can be found on the
Bill’s home page, or through the Australian
Parliament website.
When Bills have been passed and have received Royal Assent, they
become Acts, which can be found at the ComLaw
website.
The purpose of the Tax Laws Amendment (Small Business
Measures No. 1) Bill 2015 (the Bill) is to amend various income tax laws to
reduce the tax rate for incorporated businesses with an aggregate turnover of
less than $2 million from 30 per cent to 28.5 per cent. The Bill
also makes changes to maintain the franking credit passed to owners of these businesses
at 30 per cent and consequential changes to reflect the 28.5 per cent
tax rate.
Policy announcement and related
measures
On 1 February 2015, the Prime Minister, Mr Abbott, announced
that a small company tax cut from 1 July 2015 ‘at least as big as the
1.5 per cent already flagged’ would be part of a small business jobs
package.[1]
The proposal as announced in the 2015–16 Budget on
12 May 2015 was for a reduction in the company tax rate to 28.5 per
cent for small businesses from 1 July 2015.[2]
This was part of a broader ‘Growing Jobs and Small Business’ package that was
announced as part of the 2015–16 Budget.[3]
Other elements of this package included:
- a
five per cent tax discount (capped at $1,000) from 1 July 2015 for
unincorporated small businesses with an annual turnover of less than
$2 million
- small
businesses with turnover below $2 million will be able to fully and immediately
deduct every asset they acquire that is valued up to $20,000 for tax
purposes—an increase from the current $1,000 threshold[4]
- changes
to the Fringe Benefits Tax (FBT) system will expand the FBT exemption for work
related portable electronic devices
- reforms
to Capital Gains Tax (CGT) rollover will enable small businesses to change the
legal structure of their business without incurring a CGT liability and
- start-ups
will be able to immediately deduct professional expenses incurred when they
begin a business, such as legal expenses on establishing a company, trust or
partnership, rather than writing them off over five years.[5]
This Bill implements one of the measures included in the
Government’s 2015–16 Budget package of measures ‘Growing Jobs and Small
Business’.[6]
There are a number of definitions used to describe a ‘small
business’.
Australian Bureau of Statistics
The key definition of small business used by
the Australian Bureau of Statistics (ABS) is largely based on the number of
employees, with a small business defined as an ‘actively trading business with
0-19 employees’.[7]
Based on this definition, there were around two million small businesses
as at 30 June 2014, accounting for 97 per cent of businesses in
Australia.[8]
Of these small businesses, around 62 per cent were non-employing
businesses, 28 per cent had one to four employees and ten per cent
had five to 19 employees.[9]
Other Commonwealth usage
There are a number of other definitions that are used in
other Commonwealth laws and programs. These include:
- Privacy
Act 1988—defines a small business as one whose annual
turnover for the previous financial year is $3 million or less[10]
- Australian
Securities and Investments Commission Act 2001—defines a small
business as a business employing less than 100 people if the business
is, or includes, the manufacture of goods, or a business employing less than
20 people otherwise[11]
and
- Fair
Work Act 2009—defines a small business employer as an
employer with fewer than 15 employees.[12]
However, the proposal to lower the company tax rate for
small business which is put into effect by this Bill relies on the definition
in the Income Tax Assessment Act 1997 (ITAA 1997) of a small
business entity.
A business will be a small business entity in
the current financial year if:
- it
is carrying on a business in the current year; and
- one
or both of the following applies:
- in
the previous year before the current year the aggregated turnover
of the business was less than $2 million
- the
aggregated turnover for the current year is likely to be less than $2 million.
This definition, which is used as the basis for a number of
existing tax concessions, including capital gains tax concessions and
simplified depreciation arrangements.[13]
In 2012–13, there were 298,225 taxable entities meeting
this definition, of which 288,810 were profitable.[14]
These are the entities most likely to be directly impacted by the changed tax
arrangements. Of these entities, over half operated in three industries being
financial and insurance services, rental hiring and real estate services and
professional, scientific and technical services (Table 1). On average, the most
profitable industries in which these entities operated were financial and
insurance services, mining and agriculture, forestry and fishing.
Table 1: Taxable and profitable small business entities
summary financial performance, 2012–13
Industry
|
No.
of taxable and profitable small business entities
|
Share of total taxable profitable small business
entities (%)
|
Average
profit ($)
|
Average
net tax ($)
|
Average
assets ($)
|
Agriculture, Forestry and Fishing
|
4,855
|
2%
|
$113,814
|
$31,427
|
$1,174,373
|
Mining
|
920
|
0%
|
$127,103
|
$37,922
|
$1,155,115
|
Manufacturing
|
10,315
|
4%
|
$82,448
|
$24,266
|
$643,629
|
Electricity, Gas, Water and Waste
Services
|
750
|
0%
|
$86,842
|
$24,835
|
$497,557
|
Construction
|
34,725
|
12%
|
$70,452
|
$19,871
|
$758,583
|
Wholesale Trade
|
10,675
|
4%
|
$74,260
|
$21,012
|
$607,256
|
Retail Trade
|
13,150
|
5%
|
$59,532
|
$16,980
|
$15,915,974
|
Accommodation and Food Services
|
7,245
|
3%
|
$55,783
|
$16,323
|
$610,164
|
Transport, Postal and Warehousing
|
11,165
|
4%
|
$49,515
|
$13,718
|
$357,968
|
Information Media and
Telecommunications
|
2,590
|
1%
|
$78,611
|
$22,763
|
$439,758
|
Financial and Insurance Services
|
56,400
|
20%
|
$178,498
|
$43,625
|
$1,563,184
|
Rental Hiring and Real Estate
Services
|
54,000
|
19%
|
$56,958
|
$16,565
|
$736,307
|
Professional, Scientific and
Technical Services
|
41,270
|
14%
|
$80,703
|
$23,440
|
$371,508
|
Administrative and Support
Services
|
9,355
|
3%
|
$67,439
|
$19,082
|
$344,281
|
Education and Training
|
3,035
|
1%
|
$65,849
|
$19,265
|
$265,965
|
Health Care and Social Assistance
|
13,260
|
5%
|
$96,396
|
$28,578
|
$388,683
|
Arts and Recreation Services
|
2,250
|
1%
|
$83,716
|
$23,876
|
$446,828
|
Other Services
|
10,540
|
4%
|
$57,192
|
$16,623
|
$361,588
|
Other
|
2,310
|
1%
|
$105,676
|
$29,766
|
$343,696
|
Total
|
288,810
|
100%
|
$91,360
|
$24,793
|
$1,466,364
|
Source: Australian Taxation Office (ATO), ‘Table
5 Selected items and financial ratios, by company size, taxable status, profit
status and broad industry, 2012–13 income year’, ATO website, accessed
9 June 2015. The ATO taxation statistics define businesses with a turnover
of less than $2 million as 'micro’ businesses.
These 288,810 taxable and profitable small business
entities comprise part of almost 782,000 incorporated entities with a
turnover of less than $2 million in 2012–13.[15]
In 2011-12, a total of 2.3 million small business entities had a turnover
of less than $2 million, putting the number of unincorporated small
business entities at around 1.7 million of this total.[16]
Arguments for ‘special’ tax
measures for small business
There are a number of arguments in favour of concessional
tax treatment for small business. A
2009
review of such policies by the OECD noted that the main arguments in favour
of such treatment were based on positive externalities where small businesses
generate benefits greater than those accruing to private investors; and to
overcome capital market imperfections resulting from information asymmetries.
[17]
The OECD summarised these in the following terms for small and medium
enterprises (SMEs):
Positive externalities (‘spill-over’ benefits)
A main argument for SME investment incentives is that SMEs
generate benefits over and above those accruing privately to investors. The
benefits may include innovation (e.g. process innovation) that can be applied
elsewhere and positively affect economic growth in the economy. Other potential
benefits include labour training and the upgrading of skills that can be
applied subsequently, in other businesses. In deciding the amount of investment
to undertake, SME investors can be expected to consider only private benefits
and costs of investment. By ignoring social benefits that spill-over into the economy
at large, the expected outcome would be under-investment in SMEs, relative to a
socially optimally [sic] level based on social benefits and costs. Tax
incentives targeted at SMEs, at the company and/or shareholder-level, may
encourage investment closer to a social optimum.
Capital market imperfections
Another main line of argument for tax incentives for SMEs
considers capital market imperfections resulting from information asymmetries.
Perhaps the most commonly cited example is where the profitability of a
business, in particular an early-stage business with highly uncertain (risky)
returns, is better understood by managers of firms than by outside creditors.
Asymmetric information may result in the extension of credit to firms with
“quality” investments but at excessive interest rates (in excess of what would
be charged with symmetric information), or no funding (at market rates), or
costly signalling, implying in each case under-investment. Another example of
information asymmetry arises where outside equity investors are unable to
monitor activities of managers who may engage in consumption activities
inconsistent with the maximisation of firm value. In such cases, asymmetric
information, leading to significant monitoring costs or demands for increased
rates of return by outside investors, may lead to under-investment relative to
an efficient outcome based on symmetric information.[18]
Some of the other arguments in favour of preferential tax
treatment for small business are related to impediments to small business
creation and growth created by ‘normal’ tax arrangements that apply to small
businesses irrespective of size such as relatively high compliance burden, tax
on sale or inheritance of a small business and limited loss offset discouraging
risk taking.[19]
Arguments against ‘special’ tax
measures for small business
The arguments against preferential tax treatment for small
businesses include uncertainties of the extent that positive spill-over
benefits are particularly associated with small businesses and whether
asymmetric information may in some cases result in overinvestment, rather than
underinvestment.[20]
Arguments against also consider the practical implementation of such measures,
which may lead to efficiency losses (through inadequate targeting) or whether a
tax intervention is the best way to achieve a certain outcome.[21]
That the Australian income tax system includes a range of
measures that provide concessional taxation arrangements to small business
(through the $2 million annual aggregate turnover definition) suggests
that policy makers have previously generally accepted that arguments for such
measures have been convincing.
However the fact that such arguments have been accepted in
the past should not necessarily be used to support the extension of existing
measures, nor the creation of new measures. British tax academic Judith
Freedman noted that such proposals can introduce additional complexity and have
efficiency implications:
Small businesses are often seen as having special tax needs. There
are frequently demands made on their behalf by pressure groups and politicians
for special concessions, incentives and reliefs. Small business representatives
are vociferous and the cause is a popular one for politicians. The result is
far from simplification. Often layer upon layer of regulation adds elections
and decisions for the smallest businesses to cope with. There is also
consequent frequent change, which is inevitably burdensome and costly. It does
not follow from the small size of a business that the affairs of that firm or
the law applying to it are, or can be, simple. Small business affairs interact
with those of the family and other personal relationships and they offer a way
of life as well as a financial venture. They are inherently complex. Even if
complete simplicity is unattainable, however, general stability and good tax
structures will benefit all businesses, including small businesses for whom
learning about and understanding change is particularly burdensome. It may
sometimes be the case that a reform that is argued to be needed for small
businesses may be desirable for all. If that is the case then there are good
grounds based on equity and allocation, as well as simplicity and definitional
arguments, for not imposing restrictions by way of size. The arguments against
this will often relate to costs in terms of reducing revenue raised rather than
any objection by way of principle. If provisions are to be limited to small
businesses only, the reason for this limitation needs to be made clear.[22]
Rationale for the small business
company tax cut
The case for cutting the tax rate for small companies is
included in the Government’s regulation impact statement that forms part of the
Explanatory Memorandum to the Bill.[23]
The regulation impact statement notes that there are around
780,000 incorporated businesses with a turnover of less than
$2 million that may benefit from a reduction in the tax rate.[24]
The ‘problem’ identified is that the small business sector has the potential to
‘contribute strongly to national growth and competitiveness’ but that weak
conditions, regulatory costs and access to finance are impeding this growth by
the sector.[25]
The regulation impact statement identifies the key benefit
of a reduction in the small business company tax rate as being that the
reduction would allow more of these businesses to retain these earnings,
allowing them to invest more and expand their activity:
Investment is important as it leads to existing output being
produced at a lower cost (capital deepening) and new and improved ways of doing
business (innovation), which improves the amount of output produced for each
unit of input, including labour (productivity). As a result, higher investment
can lead to higher employment and wages over time. However, given the small
size of these companies, the overall macroeconomic impact is unlikely to be as
significant compared to a broader tax cut to all companies.[26]
The engine room of the economy?
The Government’s 2015–16 ‘Growing Jobs and Small Business’
package (which includes the measure to which the Bill relates) makes the claim
that ‘the hard working women and men of Australian small businesses are the
engine room of our economy’ and that ‘[t]here is no doubt small business is at
the forefront of Australia’s jobs and growth’.[27]
In support of this claim was information that in 2013–14 Australians started
over 280,000 businesses.[28]
Claims that small businesses are an ‘engine room’ have been
made in the Parliament over many years.[29]
The term has also been used as a mantra by some industry groups.[30]
However, this may be overstated.
Innovation
A recent report by the Productivity Commission on business
set up and transfer noted that small businesses (defined for the purposes of
its study as being those with fewer than 20 employees) are far less likely to
engage in innovative activity than larger businesses, with an estimated one per
cent of small businesses introducing an innovative product or service that was
‘new to Australia’ in 2012–13, compared with 14 per cent of large businesses.[31]
The Productivity Commission noted:
The vast majority (over 90 per cent) of new businesses are
micro-businesses with few (less than four) or no employees. Most business
owners are male, but female owners are becoming more prevalent in new
businesses set-up. The median age of business owners (at 47 years) is older
than the general workforce and is increasing faster. Many businesses are
started to provide employment for the owner or their family, to satisfy
lifestyle choices, to provide services to a community sector or to raise funds
for a specified purpose. Such businesses are not necessarily innovative, nor is
rapid growth necessarily sought.[32]
The ABS’s regular innovation survey publication, Innovation
in Australian Business, 2012–13, found that overall the likelihood that
a business engages in innovative activity increases as the size of the business
(measured for the purposes of the ABS publication by employment size) (Table 2).
Table 2: Innovation by business size, 2012–13
Employment size
|
Estimated number of businesses
(‘000)
|
Businesses with introduced or
implemented innovation (innovating businesses) (%)
|
Businesses with innovative
activity that was still in development (%)
|
Businesses with innovative
activity that was abandoned (%)
|
Businesses with any innovative
activity (innovation-active businesses) (%)
|
0–4 persons
|
466
|
28.9
|
18.3
|
5.3
|
34.7
|
5–19 persons
|
243
|
45.8
|
27.8
|
6.9
|
51.0
|
20–199
persons
|
58
|
58.3
|
35.6
|
6.3
|
63.4
|
200 or more
persons
|
4
|
66.8
|
51.4
|
4.4
|
74.3
|
Source: Australian Bureau of Statistics (ABS),
Innovation
in Australian business, 2012–13, Key measures of innovation, cat. no.
8158.0, ABS, Canberra, 21 August 2014, accessed 2 June 2015.
Employment, value added and wages
growth
The key data in relation to employment, value added and
wages by business size (measured in terms of number of employees) is from the ABS’s
publication Australian
Industry 2012–13.[33]
Unfortunately these data are only available for the period since 2007–08,
limiting analysis to a relatively short period.[34]
Based on these data, in 2012–13 small business accounted
for:
- 43 per
cent of total employment
- 26 per
cent of total wages and salaries and
- 33 per
cent of industry value added.
Over the period since 2006–07—a period which takes in any
effects of the global financial crisis in late 2008— small business employment
has declined in some years and increased in others, sitting at a level at 30
June 2013 that was 519,000 fewer than at 30 June 2007 (Figure 1). However,
employment in medium sized businesses continued to grow, suggesting that some
of the loss in employment in the small business sector was taken up by larger
businesses.
Figure 1: Employment by business size, selected
industries, 2007–08 to 2012–13 (‘000)
Source: Australian Bureau of Statistics (ABS),
Australian
industry 2012–13, cat. no. 8155.0, ABS, Canberra, 28 May 2014,
accessed 2 June 2015, and previous years.
Trends in employment, wages and salaries and industry value
added for small business over the period 2007–08 to 2012–13 show that while
employment declined over the period, industry value added by small business
increased by more than ten per cent (Figure 2).
Figure 2: Changes in small business indicators, selected
industries, 2007–08 to 2012–13 (2007–08 = 100)
Source: Australian Bureau of Statistics (ABS),
Australian
industry 2012–13, cat. no. 8155.0, ABS, Canberra, 28 May 2014,
accessed 2 June 2015, and previous years.
While the increase in industry value added shows that the
value of activity has increased despite the fall in employment, medium and
large businesses continue to contribute greater industry value added per
employee than small businesses (Figure 3). In the case of large businesses,
this value added per employee in 2012–13 of $131,259 per employee is
80 per cent higher than the $72,780 per employee in small business.[35]
Figure 3: Industry value added per employee for selected
industries, 2007–08 to 2012–13 ($)
Source: Australian Bureau of Statistics, Australian
industry 2012–13, cat. no. 8155.0, ABS, Canberra, 28 May 2014,
accessed 2 June 2015, and previous years.
Policy development
The proposal for a lower company tax rate for small business
has not been recommended by any government commissioned tax reviews. Rather, it
has evolved from an initial proposal by the Rudd and Gillard Governments to
bring forward by one year for small business a general cut in the company tax
rate. The Coalition’s pre-2013 election commitments then built on this proposal
with separate policies on lower company taxation and for a paid parental leave
scheme. The proposal is consistent with the Australian Greens’ 2013 election
policy. This is discussed below in more detail.
Major tax reviews
In March 2015, the Government published a discussion paper as
part of the current tax review that raises some specific tax issues relating to
small businesses. These include compliance costs, choice of business structure
and complexity.[36]
In relation to a single lower tax rate for small businesses the discussion
paper included a proposition that a lower single rate (or zero tax rate) could
be put in place to replace multiple tax concessions:
Instead of multiple concessions across the tax system, an
alternative option that could be considered is to apply a lower or zero tax
rate for small businesses. A lower rate that replaced multiple specific
concessions could encourage small businesses to spend their resources expanding
their business, rather than managing their tax affairs.[37]
This issue may be raised through the tax review, with the Government
posing the following specific questions in the discussion paper:
How effective is the current range of tax concessions (such
as CGT and industry specific concessions) at supporting small business
engagement with the tax system? To what extent do the benefits they provide
outweigh the compliance, complexity and revenue costs they introduce?
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?[38]
2008–2009
The most recently completed tax review, entitled Australia’s
Future Tax System (known as the Henry Tax Review) did not include any specific
recommendations relating to a reduced company tax rate for small business.
Rather, the Henry Review did recommended increasing the turnover threshold from
$2 million to $5 million for access to the existing small business
tax concessions as well as a general reduction in the company tax rate to
25 per cent.[39]
1998–1999
Earlier, the Review of Business Taxation (known as the Ralph
review) concentrated on the compliance cost impact on small business and
recommended simplified taxation arrangements for small business (with an annual
turnover of less than $1 million).[40]
Also included in the report of the Ralph review were recommendations relating
to changed capital gains tax arrangements and a simplified depreciation regime.[41]
1973–1975
The earliest of the reviews is known as the Asprey review.
It was conducted just after changes to a single company tax rate from a system
that imposed a lower rate on the first $10,000 of company income and a higher
rate on amounts above this. The review noted that the previous arrangements ‘may
be seen as a very crude way of providing some relief from the burden of
over-taxation to shareholders in small enterprise’.[42]
Members of the review did not favour a return to such a policy, and with
reference to policies in Canada and the United Kingdom at the time providing
for lower tax to eligible small businesses, noted that:
If special provisions are to be made for small enterprises,
the Committee would prefer the Canadian or United Kingdom model rather than a
return to what used to be the Australian law. However, the Committee takes the
view that one should not lightly introduce a new element of non-neutrality into
the company tax system.[43]
Rudd and Gillard Government
proposals
On 2 May 2010, as part of its response to the Henry Tax
Review, the Rudd Government announced that it would cut the company tax rate to
28 per cent, with the reduction being phased in from 2012–13 for small
businesses, one year earlier than for other companies.[44]
This announcement also included plans for the Resource Super Profits Tax and an
increase in the instant write‐off threshold from $1,000 to $5,000.[45]
On 2 July 2010, the Gillard Government altered the
company tax cut proposal as part of an amended mining tax—the Minerals Resource
Rent Tax (MRRT). The alteration was necessary due to reduced revenue. That
being the case, the Government announced that:
... the company tax rate will continue to be cut to 29 per cent
from 2013–14 but will not be further reduced under current fiscal conditions.
Small companies will benefit from an early cut to the company tax rate to 29
per cent from 2012–13.[46]
Legislation to implement this proposal was, however, never
introduced into the Parliament. Although the legislation to implement the MRRT
passed through both Houses of the Parliament in early 2012, by the time of the
2012–13 Budget in May 2012 the proposal for a company tax cut was abandoned.[47]
One of the reasons for this was that support for an
across-the-board company tax rate reduction was not supported by the Australian
Greens (the Greens). Their support was limited to a company tax rate cut for
incorporated small businesses only.[48]
2013 election policies
In the run-up to the 2013 Federal election, each of the
parties included proposals to enhance business in their policies.
ALP
The 2013 election policies of the Australian Labor Party’s
(ALP) did not include any proposals to change the general company tax rate.[49]
However, policies directed specifically towards small business included
increasing the instant asset write off threshold from $6,500 to $10,000 for eligible
assets purchased between 8 September 2013 and 30 June 2015.[50]
Coalition
The Coalition’s 2013 election policies included a proposal
to cut the company tax rate to 28.5 per cent from 1 July 2015.[51]
However, at the same time the Coalition proposed introducing a paid parental
leave scheme. That scheme was to be funded by a 1.5 per cent levy on
companies with a taxable income in excess of $5 million. The net effect of
the two policies would be that only those companies below this threshold would
effectively face a tax cut.[52]
Greens
The Greens were the only major party to advocate a lower
company tax rate that would apply only to small business. This policy proposed
a reduction in the company tax rate to 28 per cent from 1 July 2014
for companies with a turnover of under $2 million.[53]
An objective of the policy was to ‘to promote the vitality of the sector and to
encourage more Australians to enter into small businesses’.[54]
Part of the policy was also to increase the instant asset write off threshold
from $6,500 to $10,000.[55]
At the time of writing the Bill had not been referred to a
Committee. At the time of writing, neither the Senate Standing Committee for
the Scrutiny of Bills nor the Parliamentary Joint Committee on Human Rights had
commented on the Bill.
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed
the Bill’s compatibility with the human rights and freedoms recognised or
declared in the international instruments listed in section 3 of that Act. The
Government considers that the Bill is compatible.[56]
ALP
In his budget reply speech on 14 May 2015, the Leader
of the Opposition, Bill Shorten, indicated that the ALP would support the
proposal for a reduction in the company tax rate to 28.5 per cent.[57]
He also indicated that the ALP would support a further cut to 25 per cent,
to ‘give small businesses the sustainable boost to confidence that they
deserve, the confidence to create jobs’.[58]
Greens
The Greens welcomed the proposal for the small business
company tax cut following the release of the Budget.[59]
As noted earlier, the Greens 2013 election policy proposed a reduction in the
company tax rate to 28 per cent from 1 July 2014 for companies with a
turnover of under $2 million.[60]
This is broadly consistent with the provisions of this Bill.
Minor parties and independents
Of the minor parties and independents that had expressed a
view on the proposal:
- Senator
Xenophon was reported as supporting a proposal to cut the company tax rate to
28.5 per cent when it was first announced by Prime Minister in February
2015[61]
- the
Palmer United Party, while not indicating whether it would support the measure
in the Parliament, questioned the impact of the reduction in company tax for
small business in stimulating the economy[62]
- Senator
Madigan was reported to support a halving of the company tax rate for
businesses manufacturing in Australia[63]
- the
Family First party’s Senator Day has advocated for a single rate flat tax, and
to move to this by reducing the 30 per cent corporate tax rate[64]
and
- the
Liberal Democratic Party’s general taxation policy is to ‘substantially cut
taxes’, with the associated savings from reducing expenditures cutting the
company tax rate to 20 per cent.[65]
While some business groups have expressed concerns about the
potential complexity and distortions that may result from a two-tier company
tax rate regime, business groups generally support the policy. The Business
Council of Australia noted that:
The small business package provides some welcome relief by
assisting start-ups and helping to keep small enterprises to be [sic]
competitive.
... While a two-tier company tax rate is not ideal, the impact
of these measures is confined to a small part of the economy. It is important
for both major parties to remain committed to a lower, more internationally
competitive company tax rate for all businesses as fiscal circumstances permit.[66]
These sentiments are similar to those expressed by the
Australian Chamber of Commerce and Industry, which supports the 2015–16 Budget
small business measures as a package, but has also noted the potential
implications of a two-tier company tax rate being a ‘dog’s breakfast’.[67]
In early 2015, the Council of Small Business Organisations of
Australia (COSBOA) was advocating for a five per cent company tax rate for
smaller businesses with a turnover of up to $5 million.[68]
Following the release of the Budget, the CEO of COSBOA welcomed the small
business package:
The budget inclusions for small business have been designed
to boost confidence, boost cash flow and boost the economy, an economy that has
always been based upon the foundation of small business people.[69]
Chartered Accountants Australia and New Zealand noted that
the cut for small businesses ‘should apply across the board, and follow with a
plan to lower it over successive budgets to 25 per cent’.[70]
The Explanatory Memorandum notes that the financial impact
of the measure estimated to be $1,450 million over the four years to
2018–19 (Table 3).[71]
Table 3: Financial impact of lowering company tax rate to
28.5 per cent for small incorporated businesses, 2014–15 to 2018–19 ($
million)
|
2014–15
|
2015–16
|
2016–17
|
2017–18
|
2018–19
|
Total
|
Financial impact
|
0
|
-$250m
|
-$400m
|
-$400m
|
-$400m
|
-$1,450m
|
Source: Explanatory Memorandum, Tax
Laws Amendment (Small Business Measures No. 1) Bill 2015, p. 3,
accessed 9 June 2015.
A costing prepared by the Parliamentary Budget Office for
the Australian Greens’ proposal to reduce the company tax rate to 28 per
cent for these entities from 1 July 2014 estimated the impact to be
-$1,850 million over the four years to 2016–17 (Table 4). This costing was
also based on retaining the 30 per cent franking rate.[72]
While the PBO costed policy was based on a commencement date one year earlier
and an additional 0.5 percentage point reduction, it is interesting to
note the different profile for revenue foregone and the magnitude of the impact
of an additional 0.5 percentage point reduction.
Table 4: Financial impact of Australian Green’ 2013
election policy to lower the company tax rate to 28 per cent for small
incorporated businesses, 2014–15 to 2017–18 ($ million)
|
2013–14
|
2014–15
|
2015–16
|
2016–17
|
Total
|
Financial impact
|
-$50m
|
-$100
|
-$750m
|
-$950
|
-$1,850m
|
Source: Parliamentary Budget Office (PBO), 2013 election: Post-election
report of election commitments, ‘Attachment
H: costing documentation for Australian Greens' election commitments Part 2:
GRN001 - GRN035’, PBO website, p. 296, accessed 3 June 2015.
The Income
Tax Rates Act 1986 specifies a range of income tax rates, including the
company tax rate of 30 per cent.[73]
Item 1 of Part
1 of the Bill repeals existing subsection 23(2) of the Income Tax Rates
Act which specifies the 30 per cent rate applying to most companies.
Item 1 inserts proposed subsection 23(2) into the Income Tax
Rates Act to provide that the rate of tax for a small business entity
for a year of income is 28.5 per cent whilst a rate of 30 per cent applies
for most other companies. As stated previously, the term small business
entity is defined in subdivision 328-C of the ITAA 1997 Act to
be an entity that:
- is
carrying on a business in the current year; and
- one
or both of the following applies:
- in
the previous year before the current year the aggregated turnover
of the business was less than $2 million
- the
aggregated turnover for the current year is likely to be less than
$2 million.[74]
Importantly, the tax rate for companies is not progressive.
Companies that are not small business entities will pay the
30 per cent rate on the total of their taxable income.
Non-profit companies pay no tax on the first $416 of their
taxable income. Tax is then ‘shaded in’ at a rate of 55 per cent of the
excess over $416 until the tax on taxable income is equal to the corporate tax
rate ($915 at a 30 per cent company tax rate).[75]
Item 2 of Part 1 of the Bill repeals and replaces subsections
23(6) and (7) of the Income Tax Rates Act. Proposed subsection
23(6) modifies the ‘shade in’ rates by retaining the $416 threshold
but setting the upper threshold for companies that are a small business
entity at $863. The upper threshold of other companies is set at $915.
Credit unions are taxed differently depending on whether
they are ‘small’, ‘medium’ or ‘large’.[76]
The 45 per cent paid by medium credit unions reflects the 30 per cent
corporate tax rate. Proposed subsection 23(7) provides that the amount
of tax payable by a company that is a medium sized credit union that is a small
business entity is 42.75 per cent. Otherwise the rate is 45 per cent.
Item 3 of Part 1 of the Bill repeals
and replaces existing sections 24 and 25 of the Income Tax Rates Act to
apply the 28.5 per cent company tax rate to a trustee of corporate unit
trusts and a public trading trust that is a small business entity and a
30 per cent rate for the remaining entities.
The two tier company tax rate regime for small and larger
businesses established by the Bill has been criticised on a number of grounds.
The key criticism from certain business groups relates to the introduction of a
distortion in the tax system that may provide incentives for businesses to
restructure their tax liabilities or be a disincentive for growth.[77]
As an example, a small business entity with an aggregate
turnover of $1,999,999 (that is, less than $2 million) that makes a taxable
profit of $500,000 would be liable to pay tax of $142,500 at a 28.5 per
cent tax rate. Were the same profit made by an entity with a turnover of $2,000,010 million—just
ten dollars more—the tax liability at the 30 per cent rate would be
$150,000. The tax paid on the additional ten dollars of revenue—$7,500 in
this case—may provide a strong incentive for a business to remain below the
$2 million threshold.
The regulation impact statement in the Explanatory
Memorandum notes that this ‘tax cliff’ ‘could be a disincentive to growth and,
while it would not be very large in most circumstances, it adds to the existing
disincentives within the system to grow above the small business turnover threshold’.[78]
However, the statement also considers that such behavioural responses are
likely to be uncommon, with around 5,500 companies close to the
$2 million threshold.[79]
Another criticism of the emergence of a two tier system is
that the use of the turnover threshold reinforces the bias against low margin
small businesses, such as high volume retail operations.[80]
That said, there are a number of OECD countries that have
adopted an approach to provide preferential income tax treatment for smaller companies.
For example, smaller businesses in Canada, France, Japan and Korea benefit from
a corporate tax rate that is between 43 per cent and 67 per cent of the
standard corporate tax rate.[81]
Consequential amendments including
maintaining franking credit at 30 per cent
Under the dividend imputation system, a resident taxpayer
receiving a dividend that has had tax applied at the corporate tax rate is
entitled to an equivalent ‘franking credit’ for their individual taxable
income. This credit reduced the individual’s taxable income by an equivalent
amount, thereby avoiding double taxation on this profit.
Part 2 of the Bill makes a number of consequential
amendments to various tax laws to retain this 30 percent franking rate for
small businesses as well as to provide that a number of rebates and tax offsets
are passed through to an entity at the relevant company tax rate.
There are a number of arguments in favour of concessional
tax treatment for small business. These include the ‘spill-over benefits’
associated with intervention for small business, overcoming capital market
imperfections and higher compliance costs for these entities.
The introduction of a lower company tax rate for
businesses with a turnover of less than $2 million has not evolved from a
recommendation of a government-commissioned tax review but rather has emerged
from proposals by the ALP and the Coalition to lower the company tax rate
generally. That said, such an arrangement is a feature of a number of OECD
countries.
Members, Senators and Parliamentary staff can obtain
further information from the Parliamentary Library on (02) 6277 2500.
[1]. T
Abbott (Prime Minister), Address
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[2]. Australian
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[3]. T
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[4]. This
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[5]. Ibid.
[6]. Australian
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[7]. Australian
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[8]. Australian
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[9]. Ibid.
[10]. Privacy Act 1988,
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[11]. Australian Securities
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[12]. Fair Work Act 2009,
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[13]. Income Tax Assessment
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[14]. Australian
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[15]. Australian
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5 Selected items and financial ratios, by company size, taxable status, profit
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[16]. Treasury,
‘Small
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accessed 3 June 2015. The estimate of 1.7 million unincorporated small
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[17]. OECD,
Taxation
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[18]. Ibid.,
p. 85.
[19]. Ibid.,
p. 84.
[20]. Ibid.,
p. 94.
[21]. Ibid.,
pp. 94–95.
[22]. 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,
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[23]. Explanatory
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[24]. Ibid.,
p. 14.
[25]. Ibid.,
pp. 14–15.
[26]. Ibid.,
pp. 15–16.
[27]. Australian
Government, Budget 2015: growing jobs and small business, op. cit.,
p. 2.
[28]. Ibid.
[29]. See
for example, J Howard (Prime Minister), ‘Ministerial
statements: small business deregulation task force report: Government response’,
House of Representatives, Hansard, 24 March 1997, p. 2691,
accessed 2 June 2015; B Ripoll, ‘Private
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[30]. Australian
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accessed 2 June 2015.
[31]. Productivity
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accessed 2 June 2015.
[32]. Ibid.,
p. 4.
[33]. Australian
Bureau of Statistics (ABS), Australian industry 2012–13, op. cit.
[34]. The
first time this publication included information on employment by business size
was the 2009 release, which related to both 2006–07 and 2007–08 (Australian
Bureau of Statistics (ABS), Australian
industry 2008–09, cat. no.
8155.0, ABS, Canberra, 28 May 2009, pp. 14–17, accessed 9 June
2015)
[35]. Australian
Bureau of Statistics (ABS), Australian Industry 2012–13, op. cit.
[36]. Australian Government, Rethink:
tax discussion paper, March 2015, pp. 105–120,
accessed 2 June 2015.
[37]. Ibid.,
p. 119.
[38]. Ibid.,
p. 120.
[39]. K Henry, Australia’s
future tax system: report to the Treasurer, Part Two detailed analysis,
volume 1 of 2, December 2009, pp. 167 and 174, accessed 1 June 2015.
[40]. J
Ralph AO, A
tax system redesigned: more certain, equitable and durable, July 1999; pp. 573–589, accessed 1 June 2015.
[41]. Ibid.
[42]. Taxation Review Committee (K Asprey and R Parsons), Full
report, Australian Government Publishing Service,
Canberra, 1975, pp. 241–242, accessed 1 June 2015.
[43]. Ibid.,
paragraph 16.100, p. 242.
[44]. K Rudd (Prime Minister), Stronger,
fairer, simpler: a tax plan for our future, media release,
2 May 2010, accessed 1 June 2015.
[45]. Ibid.
[46]. J Gillard (Prime Minister), 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, accessed 1 June 2015.
[47]. Minerals Resource Rent
Tax Act 2012, accessed 1 June 2015, Australian Government, Budget
measures: budget paper no. 2: 2012–13, p. 22, accessed
1 June 2015.
[48]. P
Coorey, ‘Eyes
on Wilkie over company tax cuts’, The Sydney Morning Herald,
2 May 2012, p. 6, accessed 1 June 2015; M Grattan, ‘No
hope of tax cut for big business: Milne’, The Age, 16 April
2012, p. 3, accessed 1 June 2015.
[49]. Prime
Minister Rudd did however announce a proposal for the creation of a ‘Northern
Special Economic Zone’ for which tax incentives would apply ‘with the objective
of reducing the company tax rate for Northern Territory-based companies in five
years’ (K Rudd (Prime Minister of Australia), Growing
the north: a plan for Northern Australia, media release, 15 August
2013, accessed 1 June 2015).
[50]. Australian
Labor Party, Boosting
investment by small business, Australian Labor Party policy document,
Election 2013, p. 2, accessed 1 June 2015.
[51]. Liberal
National Coalition, The
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[52]. Liberal
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[53]. Australian
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[54]. Ibid.
[55]. Australian
Greens, Greens
focus on small business, media release, 8 August 2013, accessed
1 June 2015.
[56]. The
Statement of Compatibility with Human Rights can be found at page 11 of the Explanatory
Memorandum to the Bill.
[57]. B
Shorten, ‘Second
reading speech: Appropriation Bill (No. 1) 2015-2016’, House of
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[58]. Ibid.,
p. 95.
[59]. P
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business package puts back what the Government took away, media
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[60]. Australian
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up for small business: lower taxes, op. cit.
[61]. C
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[62]. C
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[63]. L
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[64]. B
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[65]. Liberal
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[66]. Business
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[67]. Australian
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[68]. Council
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[69]. Council
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[70]. Chartered
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[71]. Explanatory
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[72]. Parliamentary
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[73]. Income Tax Rates Act
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[74]. Income Tax Assessment
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[75]. Income
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[76]. Thresholds
for defining credit unions by size are defined in section 6H of the Income Tax Assessment
Act 1936.
[77]. P
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[78]. Explanatory
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[79]. Ibid.
[80]. Taxpayers
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[81]. OECD, ‘Tax database: Table II.2. Targeted corporate income tax rates’, OECD website, accessed 3 June 2015; OECD, ‘Tax
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