TAX COMPLICATIONS FOR SMALL BUSINESSES
Given recent media reports that the Board of Taxation is planning to eliminate inoperative provisions of the Tax Act, it is timely for the Board to also examine some of the operative provisions that are very costly for small businesses.
Inconsistent Definition of Small Business
- The entry threshold for the Simplified Tax System (being a three year average turnover of $1M or less) disadvantages small businesses that sell goods with a high turnover and low profit margin.
- A small business (i.e. defined as one where the total gross income is less than $10M in the income year before the FBT year) is exempt from FBT on providing car parking to employees that is not in a commercial car park.
- The $1M turnover threshold that requires small businesses to change the method of accounting for GST from a cash basis to an accruals basis is another burden that requires changes to the system of reporting the GST.
- One of the two basic conditions for claiming the small business capital gains tax concessions is the $5 million net asset value test. There can be difficulties in determining the type of assets that are included in this threshold including those of related parties.
- The new 25% Entrepreneurs Tax Offset which applies from 1 July 2005 is only available where the turnover of the business is less than $75,000. This concession is limited to small businesses that have elected to enter the so-called Simplified Tax System and won't apply to the majority of businesses that sell products as opposed to providing professional services.
Examples of Costly Tax Complications
The definition of "simple" in the Macquarie Dictionary Combined Edition, Reprinted Version 1992 is "easy to understand, deal with or use, not elaborate or artificial, not complex or complicated".
Unfortunately Australia's tax laws are far from being simple and small businesses are the ones that ultimately suffer from the complexities and constant changes being made to the tax system. Small businesses cannot afford the increasing costs of compliance in terms of mounting paperwork and the escalating costs of fees paid to their accountant for trying to keep up with the changes.
Below are some examples of the on-going complications in the Tax Act that are very costly for small business:
- Div 7A of the Tax Act which applies to loans made by private companies to their shareholders and associates. These rules are very complex and not too well understood by small businesses and accountants alike. For example, it took the Government many years to come up with a set of rules dealing with distributions made by family trusts to companies to take advantage of the lower company rate of 30%. The Government should consider simplifying these rules to reduce the compliance burden on small businesses and perhaps introduce a limit of between $50,000 to $100,000 before the provisions apply.
- The Capital Gains Tax small business concessions are difficult to access for many small business owners and depend upon the structure of the business. For example, if a company is owned by three individuals each having a 1/3 interest in the company, the concessions cannot be accessed as the company has more than two controlling individuals. The Board of Taxation is currently reviewing the effectiveness of these concessions.
- The introduction of the GST has been very costly for small businesses as they are forced to upgrade their software and systems each year to cope with the changes and since GST is a "transactions tax", small businesses must review each transaction to ensure it is correctly treated for GST purposes. Many small businesses have now had to become bookkeepers which comes with its own set of complex tax and accounting issues (e.g. GST implications on purchase and sale of motor vehicles and other fixed assets are often not correctly treated). The danger of getting it wrong is that small businesses will be penalised heavily by the ATO upon an audit when mistakes are ultimately found.
- The introduction of superannuation choice from 1 July 2005 will be costly for small businesses as they will need to firstly determine eligibility of certain employees, obtain information from their employees about their choice of fund, and then will be required to make superannuation payments to multiple funds. A hidden cost for employees of switching their superannuation to another fund or to their own self managed superannuation fund is that the employee may find it difficult to obtain life insurance again and also the cost of life insurance is likely to increase as the employee may have to pay retail rates instead of wholesale rates.
- The Simplified Tax System. The Government has made these concessions difficult to access by many small businesses by imposing a turnover threshold of only $1M which is not even indexed.
- The fact that the ATO issue on a daily basis a multitude of income tax and GST tax rulings, draft tax rulings, tax determinations and changes to legislation which are far too complex and impossible for small businesses and their accountants to keep up with.
- The Personal Services Income rules impose unfair restrictions on those individuals who for commercial reasons are forced to form a company to provide their consulting services. These rules in many instances ignore the existence of the company for income tax purposes and attribute all of the income back to the individual as well as disallowing some of the deductions. This increases the cost of compliance for the individual and takes no account of the fact that the individual has had to set up the company costing around $1,200, pay their accountant an additional $1,500 to $2,000 a year in fees, coupled with paying workers compensation insurance and compulsory superannuation on the wages paid through the company.
- Businesses losses incurred by sole traders and partnerships. The Tax Act requires small business owners to quarantine losses incurred from a business under the "Non-Commercial Loss" rules unless they meet certain tests such as having assessable income of at least $20,000 and producing a tax profit in 3 out of the last 5 years. Whilst these provisions were introduced in response to losses claimed from pyramid selling schemes that in reality were a hobby, they impact and act as a disincentive to many small business owners with start up losses that operate a genuine business.
- Quarterly superannuation guarantee payments. This can be costly for small businesses that don't make the superannuation payments within 28 days after the end of the quarter as they must pay a non tax deductible superannuation charge. There is no provision in the legislation for the taxation commissioner to extend the due date for payment. Furthermore if the business does the right thing and makes the superannuation guarantee payments to the appropriate superannuation fund after the due date, it is still liable for the superannuation guarantee charge leading to a double superannuation hit.
Increased Cost of Compliance
Accounting fees for small businesses have increased two to threefold as a result of the above complexities in the Tax Act and also following the introduction of the GST on 1 July 2000. Most small businesses (and accountants) are struggling to cope with all of the changes and the difficulties in complying with many pieces of unworkable legislation. The Government has turned small businesses into "paper shufflers" for the ATO by requiring that they do much of the work that the ATO did prior to the introduction of self assessment. Whilst this has created more employment and a new industry of bookkeepers, it has come at a high cost to small businesses who are also confronted with general interest charges for late payment of tax and penalties for late lodgement of documents.
About Australianbiz
Australianbiz is a website devoted exclusively to small and micro businesses and functions as a tool to assist business owners to better manage their business and income tax obligations. The site is continually maintained by practising accountants and contains handy finance tools, various calculators, business templates, business articles and monthly business tax updates. Also included is a facility to obtain quotes on small business and professional indemnity insurance, plus tools to help business owners find the right accountant and much more.
For further media information or to arrange comment please contact:
JOE KALEB
B.Bus, Master of Taxation, CA, FTIA
Practicing Chartered Accountant
Founder & CEO
AUSTRALIANBIZ PTY LTD
Email:enquiry@australianbiz.com.au
Web: www.australianbiz.com.au
