TAX LAWS AMENDMENT (2004 MEASURES NO. 7) BILL 2004: Second Reading
Mr CADMAN (Mitchell) (12.28 p.m.) —The Tax Laws Amendment (2004 Measures No. 7) Bill 2004 before the House today includes a number of measures.
The measure that has caught the attention of most speakers has been the first measure mentioned in the bill—the 25 per cent entrepreneurs' tax offset. We have changed the terminology here. `Offsets' are what used to be referred to as `rebates'. That change is regarded as simplification. I do not know why, but it seems that somebody, somewhere, changes a name and something that used to be referred to as `rebates' becomes `offsets' and therefore it is simpler. That small remark aside, the legislation contains a simplified tax system accounting method change; employee share schemes; FBT exemption thresholds for a long service award benefits; petroleum exploration incentives; simplified tax roll-over relief for depreciating assets; family trust elections and interposed entity elections; non-commercial loans; technical corrections, which are always there; amendments and other minor amendments.
The measures that the House has dealt with in the greatest detail are the ones that apply to businesses with an income of under $50,000 a year measured under the simplified tax system, and some benefits for those which have an income of less than $75,000 a year. It takes a while to understand precisely what the government has done and to see how the benefit applies to small businesses, mainly sole proprietors, but it can apply to partnerships and companies as well, so there is a flexibility in the application of this legislation that I am pleased to see.
Usually the tax office tries to limit benefits to a certain category with a multiplicity of definitions, but this one is quite simple, really: you get the full benefit with a simplified tax system income under $50,000, and some benefit with a simplified tax system income of under $75,000, for partnerships, sole individuals or companies. So that is very clear and very easy. Of course, the benefit of a 25 per cent rebate applies to those companies or individuals whose income is earned through entrepreneurial effort. So, if there is a mixed income from a number of sources, the taxpayer needs to just separate that part which is earned by way of entrepreneurial activity. There are stacks of people out there who have a number of sources of income. They supply services and some of them supply goods. The Amway agent is a classic. At night they may sell Amway products as an entrepreneur but have a regular job in the daytime. This applies to Amway or multi-tier marketing activities—whatever. I used Amway as an example but there are many out there. This provision applies only to that part of their income where they act as an entrepreneur.
There are people who supply services two or three days a week as a contractor and people who work two or three days a week in an employed position, and this provision applies to them as well. So it does not matter what form of income an individual may have; provided some part of it is from entrepreneurial effort, they are eligible to take advantage of the provision we are dealing with today. I think it is an enlightened approach and a good approach, but I think it is also capable of improvement. The step is certainly well in the right direction. At first I thought that the linkage of it to the simplified tax system was an impediment, because the take-up of the simplified tax system for small business has been quite limited and that is a disappointment. I think there are so many rules regarding the simplified tax system, rather than this measure, that need to be looked at to help business owners and operators make a decision about going into the simplified tax system without seeking professional advice, because that step into the simplified tax system does require professional advice. [start page 32]
When the provisions of simplified tax for small businesses were first introduced, a matrix produced by Rami Brass, the tax partner for RSM Bird Cameron, appeared in a publication by Taxpayers Australia dated 18 February 2002. It showed an obvious disadvantage for a person on an accrual basis, because they were not included in the simplified tax system. However, that has been changed. One of the big disadvantages of the simplified tax system is that, if a person was an accrual taxpayer—and not many small businesses are—they were disadvantaged. Many of the provisions that were complained about by the previous speaker are wiped out by the rectification of this disadvantage for those who are on accrual accounting.
So the significant step forward in the simplified system of taxation is improved today by the measures that have been brought into the House, and, on top of the improvement to the simplified system of taxation, we have the advantage of allowing entrepreneurs a 25 per cent offset for any profits they make under the simplified system. I think that is a great advantage to taxpayers who are small. The only process they have to go through is whether or not they move to the simplified system, and I do not see why that should be a requirement in this legislation. Frankly, I do not see the disadvantages of just allowing people, provided they can demonstrate activities, to be part of the simplified system.
In the table that I previously described, the remaining disadvantages for a simplified tax system are for high values and depreciation assessment. For amounts over $1,000 they must be pooled and the various claims based at various levels. There is a disadvantage under the simplified system if the useful life of a product which is bought and used is less than five years, and that applies to a number of items. So the simplified tax system is a disadvantage for that depreciation process. There is also a disadvantage for assets acquired immediately after 1 July. Credit based businesses could have been disadvantaged on an accrual system, but that has now changed, so we have something that is of benefit.
Stocktaking under the simplified system is still a disadvantage, because entry to or exit from the simplified system can create a situation where two stocktakes are needed rather than one. I believe that is an area that still needs attention. But many of the major complaints about the simplified system as a system have been removed by this legislation. That is terrific. I like that. It is giving small business—home-based businesses, sole proprietors, single operators—a better go, and that is very good. The only problem with entry into a simplified system is the requirement to take advantage of the 25 per cent offset. That is one remaining aspect where I feel those people who are taking the first step in going into business for themselves could be disadvantaged if they are not within the simplified tax system. I notice that, within the processes described in the paper I mentioned earlier, two examples are given within the cash accounting system, comparing a simplified tax system with a non-simplified tax system and showing where the impact of debtors and creditors and depreciation of various types can either advantage or disadvantage a small business. Making that decision is the pivotal thing, rather than access to the 25 per cent offset. On 18 February 2002, the writer of that paper said:
... the STS—
the simplified tax system—
will result in some “winners”. However, a large proportion of what we call small business, may either not qualify to adopt the STS provisions or, not see any significant advantage in these concessions.
The fact of the matter is that, for many of them, it is a big thing to go along to an accountant and find out. The accountants I have spoken to generally say it is not worth the trouble of investigating as the advantages are so small. I think they are probably weighing up the cost of their fees against the advantages that may accrue to the individual taxpayer, so my plea is for some further simplification of access to that simplified system, then we would be able to gain greater benefits. I notice that, in projecting the costs to the government forward, there is no projected cost to revenue in this financial year. I think there is $15 million in the following year, rising to about $125 million in a couple of years time—that is, if the provisions are taken up. So I join with some of those who have spoken about this issue, including the Treasurer himself, about the need for simplification of the total tax system.
I refer to the comments of a former Chief Justice of the High Court, Sir Harry Gibbs, which were reported recently in one of the major newspapers. In a statement on 26 January 2005, Sir Harry Gibbs said:
“The laws relating to income tax are a disgrace ... the legislation is already voluminous compared with our own earlier legislation and with other tax systems, and the volume increases from year to year ...”
He said that the tax law:
... gave excessive power to the tax office, and was an overreaction to the decisions by the High Court under Garfield Barwick in the 1970s.
However, he warned that reforming the Tax Act could not be left to Treasury and the Taxation Office.
I would endorse that. There needs to be wide consultation. As I have said previously, if we can spend less time doing taxation in Australia and we can get a better result than other countries, that is just as much a competitive factor in our balance of trade as any other factor, whether it be labour costs or anything else. Administrative costs are still costs that need to be reduced. We need to continue to work on those factors. [start page 33]
Taxation Institute Tax Director Michael Dirkis has said:
“The whole development of a principles approach has been done under a veil of secrecy ...
“The fact that it was not the subject of consultation is illustrative of how easily consultation can be avoided when a government or administration is so minded,” he said.
Mr Dirkis said there were risks in relying on broad principles and leaving the rest to regulation. The number of regulations could mushroom, and they were not subject to the same level of scrutiny as new legislation.
However, Mark Leibler, a tax lawyer who was honoured in this year's Australia Day honours, said he favoured a return to legislation that sets out basic principles, so there is a conflict of views between Mark Leibler and the Taxation Institute.
What is the best way to go? The consultation factor is very significant and important. We currently have a process of unification of the tax advice being given. Tax advice from the tax office is in-principle, not so much individualised, advice, so it can be applied more readily across the board. That is a worthy and worthwhile improvement. However, the simplification issue is more in the area of the things that I have been speaking about today—a simplified system which allows the owners of a business to make a decision as to whether they should enter into a simplified system or stick with the current rate that they are paying, the current system that they have adopted.
A lot is asked of these people in order for them to comply with taxation requirements. Under $50,000, of course, they do not have to submit a GST return, and they are absolved from many of the other provisions that businesses of over $50,000 have to comply with. That is a welcome process. However, none of these figures under the offset that we are looking at are indexed in any way. We have a system which applies to businesses of a certain type with a turnover of less than $1 million and assets of not more than $3 million. The provisions of the simplified tax system applying to this small group of individuals need to be looked at.
It is a very welcome provision. It is being downplayed, I believe, by the Australian Labor Party. The changes to the simplified tax system that are inherent in this bill are a definite improvement. But it needs to go further. I trust that, as we work towards simplification, successive changes can be made that will truly benefit the smaller entrepreneur so that they can be proud of their business and they will spend more time doing their business and less time on bookkeeping.
Author: Hon Alan Cadman MP
Source: House Hansard - 10th February 2005
Release Date: 22 Feb 2005