Plan to cut small business tax costs

Tax compliance costs for small business could be slashed under an innovative reform proposal being considered by the Federal Government.

Under the plan, formulated by the Institute of Chartered Accountants in Australia and Deloitte, income would be taxed when it flows to the owners of businesses instead of in the business itself.

This would mean companies would receive tax treatment similar to that of a partnership, while maintaining the advantages of incorporation such as limited liability.

For businesses that opt in to the system, this would mean avoiding a wide range of difficult-to-administer tax mechanisms such as carry-forward company loss provisions, fringe benefits tax provisions, family trust election provisions, trust loss provisions and franking credit rules.

Ali Noroozi, chief tax counsel with the ICAA, says tax compliance costs for businesses would be slashed under the proposed “entity flow through” (EFT) system.

“Smaller businesses have been driven to use things like trusts to deal with their tax affairs, but dealing with them can be very difficult and costly for SMEs. But by moving to the EFT system we would bypass many of these complexities,” Noroozi says.

Dealing with these things is very difficult and costly for SMEs, but by moving to an EFT system business could bypass many of these complexities,” Noroozi says.

The proposal does not contain any formal cap on the size of the business that could use the system, but it would be most cost effective for businesses with around five employees or profits in the range of $500,000.

Beyond that the tax compliance costs avoided would be outweighed by the difference between the 30% company tax rate, which would be lost, and the higher personal tax rates that would apply.

Noroozi says implementation of the proposal would also have benefits for tax accountants and agents. “It would certainly make life easier for tax practitioners, particularly those that commonly deal with businesses at the smaller end,” he says.