TAX LAWS AMENDMENT (SMALL BUSINESS) BILL 2007
Mr CADMAN (Mitchell) (12.51 p.m.)—I would like to deal with the proposed amendment later on in my comments on the Tax Laws Amendment (Small Business) Bill 2007. Firstly I would like to outline to the House and those listening some of the great benefits that small business gives to Australia.
Businesses with less than 20 employees in Australia is the usual definition for ‘small business’, and there are approximately 1,888,000 small businesses in Australia. Ninety-six per cent of all businesses are small businesses with fewer than 20 employees. It is estimated that 39 per cent of Australia’s economic production is generated by the small business sector—almost 40 per cent. Small businesses provide employment for almost 3.7 million people. Almost half of all private sector employment is in small businesses. Those figures exclude small business employees in the finance and insurance industries, of which there are large numbers.
The growth in small business was approximately 25,700 in 2005-06—the last year for which I have figures—so roughly 25,000 new small businesses year after year. Since June 2003 the number of employing small businesses has grown by 31.7 per cent. In New South Wales the total number of all businesses is approximately 671,000, of which 643,000 are small businesses. The rate of small business exits during the last financial year was 15 per cent, so there is a constant growth of businesses. Some of those exits should not necessarily be put down to bankruptcies or problems; a huge number are for positive reasons and possibly only 2.5 per cent are exiting due to lack of financial success. That is a very good result: small business growing fast, having great success, employing about half of our population and having a positive result on the economy.
About 62 per cent of small businesses are non-employing and 26 per cent employ between one and four people, so the tiny businesses comprise a substantial proportion of small business. Almost 70 per cent of small business operators are male, but there is a massively increasing number of females who are running their own businesses—often franchise businesses and often doing exceedingly well. These are very positive results from women who are taking up small businesses. Sixty per cent of small business operators are aged between 30 and 50 years, which is not an unusual figure. Ninety-six per cent of small business owners have a computer and 90 per cent of small businesses are connected to the internet, so there is a high degree of dependence on technology in small business. They are innovators and hard working.
Let us now look at the proposals contained in this legislation to simplify and bring together a whole range of measures that make it easier for small business to comply, and this is within a framework which was announced by the Treasurer on 13 November 2006. There are five different small business tests. One is on the simplified turnover provisions, one is for the goods and services tax, one is for the capital gains tax, another is for the fringe benefits tax and another is for the pay-as-you-go—that is, the BAS payments. These have now been changed. The simplified tax system is for businesses under one million; for GST, $1 million to $2 million turnover; for the capital gains tax, active assets of $5 million; for the fringe benefits tax, statutory income of less than $10 million; pay-as-you-go for less than $10 million—they have now all been brought in to an area where an annual turnover of $2 million or less is the criteria. That will cover 96 per cent of businesses.
The small businesses, so classified with a turnover of less than $2 million, will be eligible for the simplified trading stock rules, simpler depreciation rules, two-year amendment periods, intermediate deductions for certain prepaid business expenses, the entrepreneurs tax offset, choice of accounts for GST on a cash basis, choice to pay GST by instalments, annual apportionment of GST input credits, simplified accounting methods for the GST, capital gains tax 15-year asset exemption, capital gains tax 50 per cent asset reduction, capital gains tax retirement exemptions, capital gains tax rollover provisions, fringe benefits car parking concessions and pay-as-you-go instalments based on notional tax. Those have all now been brought together for the simplified system. It will be much easier for 96 per cent of small businesses.
The Treasurer has certainly moved in accordance with the provisions that were announced on 13 November last year. There is a single definition for small business of $2 million annual turnover for GST, the simplified tax system, capital gains tax, fringe benefits tax and pay-as-you-go instalments. This will cut taxes for small businesses by approximately $277 million per year and save small business time and compliance costs. That is a twin win for small businesses: time saved and a tax concession at the same time.
Under this new framework, the separate eligibility test for these measures will be replaced by a single test. Any business with an annual turnover of less than $2 million will be able to access any of these concessions. They will not need to make any further decisions to enter into the new arrangements. If they earn under $2 million, they are in. A single definition of small business will result in significant compliance savings for the businesses and, as I have said previously, they represent about 96 per cent of businesses in Australia. They will not be obliged to adopt any of the measures not suited to their requirements, but will be able to choose the ones that they want. So there is the choice for small business—an easier process—which is often made with their financial advisers or accountants. Small businesses will now be able to adopt the measures that suit them provided there is the one test, the single test, of less than $2 million per year.
The Australian Chamber of Commerce and Industry has welcomed the change, as has COSBOA, that the new definition replaces a set of complex and hard to understand rules with each tax having a different test for small business. I have read out the tests; there is a multiplicity of less than $1 million through to $10 million. They are all consistent now. And the Institute of Chartered Accountants, a very excellent organisation I have found, which recently published its own research on this area and the small business definition in tax law, has welcomed the change. The institute has said that these changes would improve access to tax concessions and reduce compliance costs, which will also have flow-on benefits to business.
The new definitions build a strong platform of tax initiatives that this government has delivered for small business. This strong platform includes the entrepreneurs tax discount, which is delivering $1.2 billion in tax cuts for more than 500,000 small businesses, enabling them to reinvest in their business or take a well-earned dividend. The government also has directed the Board of Taxation to inquire into where small business compliance costs can be further cut. So the government is on the job—moving ahead, changing tax law, simplifying the process and requiring the Board of Taxation to make further inquiries where further improvements can be made. The board is a consultative board—it is not owned by the Commissioner of Taxation—and it is comprised of people who have a knowledge of small business and can assess whether the changes are beneficial.
There were some additional measures within the budget which I need to mention. The 2007-08 federal budget contained other measures in addition to the simplification factors that we are dealing with today. Businesses with an annual turnover of less than $75,000 will no longer be required to register for GST. The current annual turnover is $50,000 and this has been pushed up to $75,000. But if businesses who wish to register have a turnover of less then $2 million and make a mix of GST-taxable and GST-free supplies they will be able to approach the ATO for a simplified accounting system. The expenditure threshold for which tax invoices are required will be raised from $50 to $75. This test threshold will also apply to the no ABN withholding requirements, and the government will provide $40 million over four years to the tax office to assist it in educating businesses to understand their GST requirements. It is not an auditing process, a scrutiny process or a standover process but a cooperative arrangement so that small businesses are not punished but understand their requirements.
The government will align the pay as you go instalment requirements for those entities which have voluntarily registered for the GST. This will apply to businesses with an annual turnover of less than $75,000. The new measure will allow those entities to lodge one business activity statement per year and satisfy their PAYG and GST obligations. Those are further amendments to the tax law and changes in its administration that were implemented in the last budget.
The Australian Labor Party and the Leader of the Opposition have put forward proposals that have been proclaimed by speaker after speaker in the House today. Coming from a small business background—and none of the speakers so far can claim that—I had a look at what they are proposing and thought how practical their proposals were. You have to run a small business and sign the cheques to know whether or not this thing—GST easy or whatever it is called—is going to work. But I saw in the Financial Review a few days ago some comments by two practising accountants who deal with small businesses every day. I noted comments by Greg Hayes, the Senior Partner of Hayes Knight accountants, who said:
They say the right things but in meaningful terms I don’t think they will produce a result for small business.
PKF partner Helen Argiris says it is a vain attempt to gain the small business vote:
… with what sounds like a wonderful idea, when in fact, no one has sat down and thought of the potential implications and pitfalls.
I want to bring to the attention of the House and the Australian Labor Party that what they are going into could cause dangers and more problems than they are considering. They think it is a wonderful change that they are proposing, and to look at it superficially there may be some attractions. But when you look at the details of how it is going to work you see it uses a method of ratios determined by the Australian Taxation Office instead of calculating the GST liability for individual items, and it applies the ratio to sales, to purchases or to both. Mr Hayes of Hayes Knight has said that with so many types of businesses often running on fine profit margins owners are reluctant to rely on a statistical approximation in case they fall outside the norm and end up with a refund that is lower than if they had calculated all items individually. You could finish up with a refund that is lower but you could also finish up with an expenditure greater than you expected. So in depending on a tax-generated ratio there is huge risk for businesses which are running close to the margin. I draw that to the attention of the House. Mr Hayes is quoted in the Financial Review of 1 May as saying:
Most businesses I talk to prefer not to take the risk.
So they would prefer to do their own calculations on the exact turnover in their businesses rather than relying on an estimation or a ratio applied by the tax office.
Under the Labor Party proposals, businesses can opt for the business norms or the snapshot method. Under that method, dealt with by a previous speaker, two snapshots are taken—one in the first half of the year and one in the second half of the year—and the ratio is calculated on those two snapshots, thereby, it is proposed, getting an accurate picture of what is going on in the business. But many businesses are cyclical or seasonal in their activity and Ms Argiris said she was concerned that the apparent ease of the snapshot method could cause a tax flow problem for uneducated taxpayers. For instance, if the snapshot ratio were calculated during a brief period of low turnover and applied for the rest of the year when business was high, the operator would not be putting aside sufficient cash flow to cover the GST on actual sales.
So there is an additional problem here that is not obvious, because all of these factors are required to be reconciled under the current system at the end of the year. If that reconciliation does not take place, as proposed by the Australian Labor Party, in an audit two or three years down the track a business could find that the reconciliations are all out of whack because they have relied on a ratio for their expenditure which is going to cause them either to pay too much taxation or to have a detrimental or advantageous imbalance. The fact of the matter is that according to two experienced accountants—not according to the Treasurer or me—the uncertainty of what is being proposed could create difficulties that are unforeseen by the business at the time and where a day of reckoning some three or four years later could be quite damaging. According to the AFR article, Mr Hayes says:
“You would see that businesses which have not gone through reconciliation have wide variations between their accounting and tax reporting.”
The article continues:
Unravelling those differences could take three or four years to sort out.
So, whilst the system has become more complicated, these efforts by the government clarify and simplify tax for small business. I really do welcome them and think that they are long overdue. I particularly like the change now allowed to small business from $1 million to $2 million for cash accounting processes. Many businesses prefer cash accounting rather than the accrual system. That measure alone is very significant, but I warn small business—and I warn Tony Steven of COSBOA—that these matters need to be looked at very carefully. Mr Steven was not quite as glowing as was suggested by previous speakers. There was a degree of caution in his comments when he said he thought the proposals by the Australian Labor Party ‘might be an improvement’. But Mr Steven’s role is really to give a tick to anything that sounds as if it is going to make life better for small business. That is his job; that is the role of the CEO of COSBOA, so he would welcome anything that appeared to make things look better. However, the Treasurer sounded a degree of caution when he indicated that we have moved well in applying the ratio system where necessary. We are not going to go down the non-reconciliation line. Small businesses need to know that, at the end of their period, they are going to be right on the button and not have some unexpected bill or be running short of cash when there was no need to because they have overestimated what they should be paying. I think that the process that the government has adopted while holding open the prospect of more changes in the future is very sensible.
The Work Choices changes and the getting rid of unfair dismissal laws for small business have created job after job after job. Australian Labor Party MPs need to walk around their electorates and talk to small businesses to find out how damaging those laws were and how they impacted on employment opportunities. Employers were not taking the risk—making their staff work longer hours, with unnecessary overtime in some instances, to cover the needs of their businesses under pressure to produce, when in fact getting extra people onto the floor or into the business was a much better solution. The unfair dismissal laws allowed that to happen. (Time expired)
Author: Alan Cadman MP
Source: House Hansard - 24th May 2007
Release Date: 24 May 2007