Young SMEs hit harder by corporate tax: OECD report

Governments around the world need to do more to make sure corporate taxes do not continue to disproportionately affect SMEs, according to an OECD report published this month.

The Taxation of SMEs in OECD and G20 Countries report found compliance costs are proportionately higher for small businesses in comparison to larger firms across various tax frameworks.

Taxes applying to all businesses can often work against companies at the smaller end of town, particularly in their first year of operation, according to the report.

The research paper examined the tax systems affecting SMEs in 39 countries, including Australia, China, Finland, Ireland, Israel, Turkey and Mexico.

Despite some taxes proving to be an obstacle to business growth and job creation, the OECD report found in some instances a country’s tax regime can help small businesses overcome certain challenges – such as access to necessary equipment.

For example, most countries in the OECD have some sort of system in place to allow small businesses to effectively reduce their tax bill through accelerated depreciation or immediately writing-off an asset purchase.

In this year’s federal budget, the Australian government extended the threshold for immediate asset depreciation from $1000 to $20,000.

Germany allows small businesses to use accelerated depreciation for assets costing less than the equivalent of $380,000, according to the OECD report.

Meanwhile, Japan allows SMEs to immediately write-off assets costing less than the equivalent of $3500.

Federal Treasurer Joe Hockey flagged further improvements to the way small businesses are taxed at this year’s National Small Business Summit in Sydney.

Stuart Dall, tax partner at Pitcher Partners, told SmartCompany Australia’s multiple taxation regimes are a particular headache for small business owners.

“We’ve got income tax regimes, GST regimes, excise tax regimes, payroll tax regimes, WorkCover, PAYG and the list goes on,” Dall says.

“It really is a complex tax system and I think tax reform is the catalyst to simplify that.

“In the tax reform discussions that have gone on so far, there has been a lot of discussion around personal tax and around GST. There hasn’t been that much discussion in the wider arena on small and medium businesses at this stage, but I definitely think it’s coming.”

Dall says the root cause of all this complexity for small business owners is the fact that income in different legal structures can be treated differently for tax purposes in Australia.

“We certainly think, through the tax reform process, that there’s an opportunity for some alignment in the tax system,” he says.

“Our constituency and our client base have enough challenges outside of the tax arena… they want to get on with business.”

One proposal Pitcher Partners has put forward in order to potentially help small businesses is a dual income tax system.

“The dual income tax system is basically saying let’s apply a flatter income tax rate to all legal structures rather than having the differences that arise between the various legal structures at the moment,” Dall says.

“We think that would go a long way to simplify that tax system.”