Board of Taxation report on tax and small business: what’s in it for your business?

The federal government recently released the Board of Taxation’s report on taxation impediments to the success and growth of small business, together with the government’s response to that report.

The government says it wants to simplify the interactions of small businesses with the tax system and make Australia one of the best places to start and grow a business. The 126-page report focused on short and medium-term priorities for small business tax reform with a particular focus on simplifying processes and cutting excessive red tape.

Read more: SMEs tied up in excessive red tape – SME Direction Survey  

A number of the board’s recommendations will be examined as part of the government’s forthcoming tax reform white paper.

Board recommendations included:

• That the Australian Tax Office revise Miscellaneous Taxation Ruling MT 2006/1 (about carrying on an enterprise) and other guidance material to include activities which will evidence that an applicant is intending to carry on an enterprise and is therefore eligible for an ABN.
• The report said the additional activities should be typical of the kinds of things, from a practical perspective, a person may do prior to actually carrying on an enterprise but are not currently within the guidance material.
• Specifically, the board recommended the online ABN application tool ask whether the applicant intends to carry on an enterprise, followed by a “drop down” menu with the extended list of activities that confirm an applicant’s eligibility for an ABN.
• In its response, the government noted that the ATO had already taken steps to implement this recommendation. The ATO is already working to deliver improvements to the ABN online registration facility that will make it easier for start-up businesses to self-assess their entitlement to an ABN.
• That the ATO review its employee/contractor tool. This employee/contractor issue regularly confuses SMEs.
• That the ATO should continue to develop a prototype online decision tool re the Personal Services Income (PSI) rules. The board also recommended that:
• The tool should go further than just working through the PSI tests; it should where possible incorporate material that clarifies what the result means for the taxpayer.
• Furthermore, where the PSI tool is used in good faith, the tool should provide a decision that will provide protection from the imposition of penalties where the user relies on the outcome.
• In its response, the government said the recommendation is in the process of being implemented by the ATO with consultation on a prototype having commenced in August 2014.
• That the ATO, and its relevant advisory groups, review whether the quarterly reporting obligations for small businesses could be significantly simplified. Many SMEs would surely say this is a “no brainer” – bring it on!
• The alignment of the 21 July Taxable Payments Reporting System reporting date with the 28 August BAS lodgment date to the latter date.
• That the small business entity turnover threshold be increased to at least $3 million and investigate the feasibility of an increase to $5 million. In its response, the government said it supports reducing the regulatory burden on small business and will consider small business taxation in the context of the tax white paper.
• An increase to the “minor and infrequent” FBT (fringe benefits tax) threshold from $300 to, at least, $500. In its response, the government said it will consider FBT in the context of the tax white paper.
• That there be an investigation of the possibility of aligning the FBT year to the income tax year. The tax white paper may look at this.
• That the superannuation guarantee charge be calculated on the basis of OTE (ordinary time earnings) rather than salary and wages to align it with the way that superannuation contributions are calculated. While OTE is a more complex definition, it would mean no change to employers’ current calculations. In its response, the government said it supports this recommendation and has agreed to implement this proposal from 1 July 2016 as part of the package of reforms to be implemented to reduce small business superannuation compliance costs. The government will consult with stakeholders on implementation details.
• That the calculation of the Super Guarantee (SG) Charge components be redesigned by legislation. In its response, the government said it supports this recommendation and has agreed to simplify and reduce the severity of the SG Charge with effect 1 July 2016 as part of the package of reforms to be implemented to reduce small business superannuation compliance costs. The government will consult with stakeholders on implementation details.
• That the SG Charge and any employer contributions paid to a superannuation fund that are used to offset the SG Charge payable should be deductible to the employer when the amounts are paid. The government said it does not support this recommendation. The government has agreed to reduce the severity of the current SG Charge arrangements, and in the context of these changes, considers that retention of non-deductibility is important to deter non-compliance.
• The board recommended allowing employers to assess superannuation obligations for employees against a quarterly threshold of $1350 (currently, the threshold is $450 per month). Employers who do not wish to change their current systems and processes would still meet their superannuation obligations if they continue to test on a monthly basis. The board said it recognised that this may exclude some low income earners from superannuation coverage. However, it considered it would reduce compliance costs for small businesses, particularly for those with a large number of short-term casual employees. The government said it does not support this recommendation. It said the proposal could reduce superannuation for some low income earners and would not reduce compliance costs for the majority of small business that pay their SG monthly.

On medium to longer term reforms, the board said it considers a more fundamental review of the small business CGT concessions was warranted given the potential for significant simplification and reduction in compliance costs.

The board said a more complex issue unlikely to be resolved in the short or medium term is whether tax treatment should be consistent regardless of business structure or entity type. Recognising that this would be a very difficult and complex review, the board considers it should be reviewed given the substantial benefits it could provide. A related issue is the taxation of trusts which, although is relevant across the business sector, presents particular challenges for small businesses as it is a common entity used by them.

Small Business Minister Bruce Billson and the Assistant Treasurer Josh Frydenberg said the report will be an important input to the government’s broader considerations on small business taxation and is particularly timely ahead of the government’s release of its tax white paper.

At the end of the day, all we have at the moment is a report to government with recommendations. The board’s report is nonetheless important for SMEs and it is to be hoped the tax white paper will come through with some positive recommendations for changes to taxation arrangements affecting SMEs. Many of the issues involved have been around for years. Of course, as always, the proof of the pudding will be in the eating. Realisation of any recommendations in legislation that is actually passed by Parliament, or Tax Office administration changes (where possible), is what SMEs will be hanging out for. The term “don’t hold your breath” comes to mind, but hopefully any changes will have the support of the major political parties.

Terry Hayes is the editor-in-chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.