SMEs and tax - is there a solution?
The taxation of small to medium sized enterprises (SMEs) is an issue that governments around the globe have consistently struggled with.
Author
Mark Pizzacalla
Partner
- Details
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| Location: | Melbourne |
| Division: | Tax Consulting |
| Publish Date: | 14/07/2008 |
It is often said that small business is the lifeblood of an economy, and there is no doubt that this is the case in Australia. It is therefore hoped that the Rudd Government will reassess tax policies as they apply to small businesses, to help stimulate the economy.
The taxation of small to medium sized enterprises (SMEs) is an issue that governments around the globe have consistently struggled with.
Ideally, tax policies should be tailored for SMEs by considering the different stages of growth. Therefore, Australia’s review of the definition of small business is a step in the right direction.
Various business groups have voiced their concerns about to the growing burden, legal complexity, and increased compliance costs experienced when operating a business in Australia, and particularly a small business.
Unfortunately, the introduction of the various tax concessions targeted at SMEs have generally been complicated, costly to access, and difficult to administer.
A more focused approach on different segments of the SME sector through appropriately targeted tax initiatives and incentives should deliver better outcomes compared to previous attempts (such as the Simplified Tax System regime).
As is so often the case, any proposed tax changes that may bring about the greatest benefits to SMEs are usually the most difficult to achieve. However, some useful parameters include:
- Lower the overall tax burden. Start-ups aside, tax policy should assist SMEs maintain profitability whilst also easing cash flow burdens. Generally, lower marginal rates encourage entrepreneurial activity and provide incentive for self-employment. However, some caution needs to be exercised here. The UK government’s introduction of the zero tax rate band for incorporated businesses in 2002 was meant to incentivise the SME sector; however, its poor targeting and complex “anti-avoidance” provisions meant that any potential tax benefits quickly disappeared.
- Take a more focused approach. The tax system should both encourage people to take the risk to start up a business, and provide further incentives along the way to those who succeed.
- Increase investment tax incentives. Evidence suggests that these types of initiatives more strongly influence SME investment decisions than those of larger businesses.
- Encourage retention of taxable profits. This would allow profits to be reinvested into the business to help establish a capital base, instead of business owners using the funds personally. The implications for owner remuneration would need to be considered as part of this process.
- Increase management and employee tax participation incentives. In particular, increasing the tax-free movement of capital when introducing new people into the business.
- Allow access to a higher R&D concession rate. While business spending on R&D has continued to rise over the last seven years up to 2005-06, Australia still lags behind the OECD average R&D spend.
- Increase simplicity in the tax law. To date, simplicity has been sadly lacking in Australia’s changing tax landscape. Arguably, this is also evidenced by the fact that Australian taxpayers are regarded as one of the most tax agent dependent taxpayers in the world.