Home-based start-ups hit out at vehicle tax write-off

Home-based business groups and tax experts have hit out at the Federal Government’s plan to scrap the Entrepreneurs’ Tax Offset and replace it with an across-the-board deduction of $5,000 for purchasing new cars, arguing start-ups will suffer as a result.

The plan, announced by Treasurer Wayne Swan yesterday, was decided upon after the Future Tax System Review recommended the ETO be scrapped due to high compliance costs and poor targeting.

It is expected the cut will see the Government save $365 million over four years, while $350 million of that will be pumped into the new $5,000 vehicle deduction.

The new initiative will provide businesses with an instant write-off of the first $5,000 of any vehicle purchased from 2012-13.

It will combine with other initiatives announced during the Henry Tax Review, which include an immediate write-off of all assets valued at under $5,000, and a reduction in the company tax rate to 29%.

“AFTS concluded that ETO provided a disincentive for businesses to grow because the benefit available started to decline at $50,000 of annual turnover and cut out completely at $75,000,” Swan said.

“The ETO was also only available to individuals with incomes under $70,000 and its poor targeting and complexity meant 2.3 million small businesses missed out on any benefit.”

The ETO provided small businesses, with turnover under $50,000, a tax offset equal to 25% of the income tax payable on business income. The benefit was phased out and stops once the business income hits $70,000.

Barbara Gabogrecan, president of Home Based Business Australia, has labeled the move as incongruous, arguing that it’s like “comparing oranges with apples”.

“Sure, if they want to give something towards purchasing a new car, so be it. But why take away a tax incentive for people to set up their own business?” she says.

Gabogrecan says most home-based businesses have no need for a car, particularly if they operate their business online.

“What the Government’s really doing is helping the car industry, not helping the home-based businesspeople,” she says.

Sue Prestney, principal of accounting firm MGI Melbourne, has also voiced her concern over the decision, saying the Government should think twice before taking away early-stage assistance.

“I would think it isn’t terribly targeted; it just sort of rewards people for having low turnover. While it’s nice to give people a bit of a leg-up when they’re starting out in business, I’m not sure this was the best way of doing that,” Prestney says.

“Having said that, any assistance you get when you’re starting up is worthwhile, and you would not like to lose this and not get compensated somehow.”

Prestney says although there is only a small number of businesses using the offset, the Government should still replace it with start-up assistance.