Tax reform surges back into view, including cash flow taxes set to benefit small business

Australian leaders should consider reforming the tax landscape to kickstart productivity, Australian Industry Group chief executive Innes Willox says, highlighting a cash flow tax measure economists claim would benefit small businesses in particular.

Willox fronted the National Press Club on Wednesday, highlighting the Australian Industry (Ai) Group’s five-point response to the next phase of the federal government’s industrial relations reform agenda.

The address questioned how changes to the definition of casual work, multi-employer bargaining, the gig economy, ‘Same Job, Same Pay’ rules, and the expanded rights of union officials would bolster Australian productivity.

With those measures front and centre, the speech only briefly touched on taxation reform as another driver of productivity.

Speaking to the Australian Financial Review, Willox said major tax reform was no less important to the nation’s economic future.

Ai Group chief executive Innes Willox

Existing company tax rates of 30% make Australia uncompetitive in the international market, said Willox, whose Ai Group represents some of the nation’s biggest employers and the local arms of global companies.

A 25% tax rate for entities with annual turnovers below $50 million —  a group which includes the vast majority of small and medium-sized businesses — ought to be overhauled in favour of a single, uniform tax rate on business, he said.

The basic GST rate could be lifted from 10%, or the range of goods and services it applies to could be expanded, Willox said.

Perhaps his most significant stance was his suggestion that a slew of taxes levelled on businesses could be replaced with a simpler cash flow tax.

What is cash flow tax?

Proponents of a broad, low-rate company cash flow tax present it as a simpler way to tax businesses, compared to the existing patchwork of company tax, payroll tax, GST, and insurance levy systems.

It was thrust into the public consciousness in 2010 when former treasury secretary Ken Henry provided his mammoth review of the Australian taxation system to then-Treasurer Wayne Swan.

Advocates claim it would be an efficient way to tax consumption, compared to what Henry called “narrow product taxes” like state-based payroll tax.

“The tax could be designed so that returns from labour [profits] would be taxed, making an additional payroll tax unnecessary,” Henry said in 2010.

It would also supersede GST, a move Henry said would significantly ease the compliance burden for entrepreneurs.

“Moreover, complying with the GST is costly for business — particularly small businesses,” he said.

“It is an operationally complex tax, designed on tax invoice concepts more suited to the documentary standards of the 1960s than the digital potential of the 21st century.”

Some economists believe it could also level the playing field between small businesses and their bigger competitors, which are often more likely to minimise their tax obligations by taking on significant debts.

Economists Ross Garnaut, Craig Emerson, Reuben Finighan, and Stephen Anthony said a cash flow tax model could eliminate “the artificial promotion of debt over equity” in Australian businesses.

“It would also remove a large, systematic bias in favour of foreign and larger against Australian-owned and smaller enterprises in the current corporate tax system, through removing opportunities for avoidance and evasion that are generally more readily available to foreign and larger than for Australian and smaller businesses,” they said.

Conversely, they said it would encourage productive investment — and “increased incentives for investment would be especially strong in the competitive parts of the economy, where small and medium-sized businesses are dominant”.

What is the status of tax reform?

Critics say successive governments have failed to enact the dramatic tax reforms set out in the landmark 2010 paper.

Although there is a broad appetite for tax reform in the private sector, Henry this year declared there has only been “mere tinkering” since 2010.

The Albanese government’s action on superannuation tax rules, multinational tax avoidance schemes, and discussions about rewinding the Stage 3 tax breaks, “don’t scratch the surface” of the reform required, he added.

Speaking to the Australian Financial Review, Willox welcomed efforts by independent senator Allegra Spender to broach the issue of tax reform.

A shrinking pool of workers paying income tax, and a growing number of ageing Australians entitled to taxpayer support, point to the need for reform, Spender wrote in April.

“Our current tax system doesn’t meet any of these criteria, nor does it drive innovation and economic dynamism,” she said.

Although Willox’s speech was focused on how industrial relations reform will impact big business, it is clear the private sector and select lawmakers have not forgotten the promise of tax reform — including measures purportedly designed to make tax simpler and fairer for small businesses.