How the government’s “debt tax” targeting top earners will hit your business

If a “debt tax” targeting top earners is included in this year’s budget it will directly hit many small businesses, particularly those which are unincorporated, according to tax experts. 

As SmartCompany reported earlier this week, the government is considering increasing income tax in the May 13 budget.   

Further details of the proposed tax increase have now been leaked, with Fairfax reporting the government is considering a 1% pre-tax levy on the pay of people earning more than $80,000 a year, rising to 2% for those earning more than $180,000.

This would increase the top marginal tax rate to 49%, which places it well above Australia’s neighbours with top tax rates of 15% in Hong Kong, 20% in Singapore, 30% in Indonesia and 42% in South Korea.

Before last year’s election, Prime Minister Tony Abbott promised there would be no new taxes but he has now indicated his thinking has changed if a debt tax is “temporary”. 

“I think if there was a permanent increase in taxation that would certainly be inconsistent with the sort of things that were said before the election,” Abbott said in an interview with radio station 3AW yesterday.

“We want taxes going down not going up, but when you’re in a difficult position, sometimes there needs to be some short-term pain for some long-term gain.”

Head of policy at CPA Australia, Paul Drum, says the pre-budget leaks about the debt tax appear to be “more than wild speculation”.

“This drip feed of information seems to be quite specific. It has a ring of truth to it.”

Drum says the recent RBA minutes don’t paint a very rosy picture of the Australian economy and against that background any increase in income tax will only further dampen consumer confidence.

“Of the 2.4 million businesses in Australia, 1.6 million are unincorporated, so any increase in income tax directly affects their take-home profits,” he says.

“At a time when we are looking at how we enhance Australia’s competitiveness in the Asian century, any increase in income tax is really an economic handbrake on the SME sector.”

Tristan Webb, national tax director at Crowe Horwath, told SmartCompany while it was hard to discern exactly what is being proposed it appears the tax increase will be applied on a total tax basis.

This would make it similar to the Medicare levy and once you are over the tax threshold you pay it on the full amount.

“It could hit the smaller end of town harder as [SMEs] don’t have that capacity to retain profits,” Webb says.   

“One of the key details will be what the base is; we don’t know what that is at this stage. It may be worthwhile salary sacrificing just to get down below that threshold.”

Webb says the proposed debt tax could have implications for the payment of dividends by SMEs and capital gains tax.

“There will be issues with payments of dividends for SMEs, you will need to get your timing right as for many people it will be better to pay before the end of the year,” he says.

“There will also be issues around CGT, if you are thinking of selling a business asset or shares it could potentially have flow-on affects.”  

Webb says the debt tax will cost SMEs more in terms of the total tax paid.

“People will have to do the reverse of what they have done for years, they will be looking to derive income early and send out invoices early and won’t be so interested in generating deductions in the current year,” he says.   

A spokesperson for Small Business Minister Bruce Billson told SmartCompany the Coalition government promised to fix Labor’s damage and that is what it would do. 

“In relation to specific budget decisions, the budget will be presented to Parliament on May 13 – we will not speculate and play rule-in, rule-out games about the content of the budget,” he said.