SME tax experts bracing for compliance cost of Stage 3 tax cut tweaks

Adjustments to Stage 3 income tax cuts will bring quiet compliance costs to small businesses and their advisors, one accountant says, as the profession calls for more holisitic tax reform.

The Albanese government has signaled it will rework tax reforms starting in July this year, providing a more significant tax cut to low- and middle-income earners while reducing the tax cut promised to those in Australia’s top income brackets.

The original plan, which was legislated in 2018 and until recently had the public support of the Albanese government, would have:

• Removed the 37% tax bracket;
• Adjusted the 32.5% marginal tax bracket, which applies to taxable income over $45,001, with a new, flat 30% tax rate between $45,001 and $200,000;
• Adjusted the top bracket to 45% for taxable incomes above $200,001, up from the previous starting threshold of $180,000.

It was set to deliver $9,075 in tax cuts to those earning above $200,000, compared to $375 for those on a salary of $60,000, and $0 for those earning under $45,000.

Citing changing economic conditions and fairness to lower-income earners, the government is now poised to:

• Slash the bottom tax rate, which applies to income up of $18,001 to $45,000, from 19% to 16%;
• Adjust the 32.5% marginal tax bracket to 30% for incomes between $45,001 and $135,000;
• Apply a 37% bracket for incomes between $135,001 and $190,000,
• Adjust the top bracket to 45% for incomes above $190,000, instead of $200,000 under the original Stage 3 plan.

Tax breaks for entrepeneurs, but compliance costs likely

The plan, if backed by parliament, would deliver an $804 tax cut to the vast majority of taxpayers, while slashing the $9,075 cut promised to those earning above $200,000 to $4,529.

Small businesses and their advisors will need to adjust to the shake-up before the new financial year ticks over, said Lisa Greig, tax consultant and principal at Perigee Advisers.

SMEs with employees will need to rethink their pay-as-you-go tables before July 1 should the new Stage 3 changes come into effect.

Business accounting platforms will also need to adjust their calculations if and when the updates receive royal assent, which may leave precious little time before the financial new year ticks over.

While many small business owners stand to personally benefit from the proposed Stage 3 tweaks, adjusting to the changes will bring its own compliance cost.

“All the tax planning has been around Stage 3 going through, so doing tax planning for any of our small business clients, we’ve assumed the tax rates that have been legislated,” Greig told SmartCompany on Thursday.

“So any changes then cause confusion more than anything else.”

“It’s just frustrating, because for me, all the tax planning goes out the window,” Greig added.

Without commenting on the fairness of the Albanese government’s proposed amendments, and the political firestorm surrounding them, Greig said the profession appreciates clear guidance well ahead of tax time.

“We like certainty, we like planning things,” she said.

“And this is just another thing where we go, ‘Okay, what happens now?'”

Tax professionals seek deeper reforms

While accountants are now scrambling to work around the likely adjustments to Stage 3 tax cuts, tax professionals say the federal government should not ignore calls for orderly and holistic tax reform.

The Stage 3 re-work is “not tax reform in any shape or form… They’re just shuffling the amounts,” Greig said.

Australia’s tax mix is too reliant on income tax, Greig said, suggesting less reliance on income tax could ease the compliance burden for small businesses.

The importance of reform, and the broadening of Australia’s tax base, is a sentiment shared by other luminaries in the tax profession.

Mark Molesworth, tax partner at advisory firm BDO Australia, said the Stage 3 tweaks should lead to further, deeper changes.

“We hope that these changes are the first step towards a more meaningful conversation around the tax mix in Australia,” Molesworth told SmartCompany.

“Our tax system is overly reliant on personal income tax receipts — something that has been repeatedly identified as economically depressing by the OECD and IMF.

“Tax reform requires more than just the tinkering of tax thresholds and rates,” Molesworth continued.

“We hope politicians of all political persuasions will be willing to commit to real reform of our tax mix to encourage economic growth and productivity.”