Beyond the need to devise a long-term tax reform agenda, the other major tax wish-list items contained in the IPA’s pre-Budget submission can be summarised as follows:
- Concessionary tax rate: The IPA has been proposing a concessionary rate of tax for small business income via a tax offset, similar to the recently abolished entrepreneurs’ tax offset. Such a measure is needed to compensate small business owners for the regressive nature of compliance costs and reward entrepreneurial activity. This proposal can be substantially funded by redirecting existing tax concessions in favour of this measure. The aim is to flatten the tax rate applying to small business income in lieu of removing a suite of existing tax concessions.
- Tax deduction for financial advice: The IPA believes there is a strong case to consider tax deductibility for all types of financial planning advice. Members of professional accounting bodies are uniquely positioned to help Australians organise their finances and plan for their retirement by being able to provide independent non-product advice when the new limited licensing regime begins on 1 July. Allowing initial advice fees to be tax deductible would greatly assist consumers’ access to much-needed affordable financial advice.
- FBT review: A comprehensive review of FBT legislation is required. Fringe benefits tax incurs the highest compliance cost relative to the revenue generated and there is considerable scope to reduce the compliance burden, especially for small businesses. The complexity of the FBT system is exacerbated by the fact that the incidence of the taxation of fringe benefits falls on employers. Taxing fringe benefits at the employee level has the potential to deliver greater neutrality in the treatment of cash and non-cash remuneration and, at the same time, reduce compliance costs for employers and employees.
- Simpler structure option for small business: There are already overseas precedents for establishing a specifically designed entity for small businesses that bestows a number of advantages, such as asset protection and flow-through tax treatment. One of the IPA’s aspirational goals to simplify the tax system for small business is to devise a business structure that eliminates the need to have multiple structures. Many businesses set up multiple structures in order to achieve certain tax outcomes that would be unavailable through the use of one stand-alone entity. Features such as asset protection, retention of profits for working capital, lower tax rates, access to CGT discount, succession planning and income distribution are features small businesses desire. Small businesses generally use a combination of entities to achieve these desired outcomes. Once multiple structures are adopted, complexity and compliance costs increase dramatically, exposing small businesses to the full raft of integrity measures. In the US, for example, small businesses have the option to set up using an S Corporation that bestows a number of advantages, such as asset protection and flow-through tax treatment.
- Division 7A rewrite: Since Division 7A was enacted, there have been a significant number of piecemeal legislative amendments, and it has grown exponentially to a point where the provisions have become too complex to understand, thereby creating unnecessary compliance problems. Division 7A still represents one of the most commonly encountered problem areas for practitioners. The time has come to rewrite these provisions into the Income Tax Assessment Act 1997 (ITAA 97) to streamline their operation and remove uncertainties. This is particularly important since the release of Taxation Ruling TR 2010/3, which sets out the Commissioner’s view on when a private company with an unpaid present entitlement (UPE) from an associated trust is considered to have made a loan for Division 7A purposes. This ruling effectively brings UPEs to corporate beneficiaries into the Division 7A net and turns them into deemed dividends unless corrective action is taken. If the Government’s policy intent is to extend Division 7A to UPEs, it needs to consider more commercially acceptable options with respect to repayment of loansto replace the current ATO guidance contained in PS LA 2010/4. That guidance provides three investment options, with most taxpayers only choosing option 1 or 2. Both options require the principal to be repaid at the end of a seven- or 10-year term.The Board of Taxation is undertaking a post-implementation review of Division 7A of the 1936 ITAA to determine whether the legislation is operating as intended and whether it can be improved to reduce high compliance costs. One of the reform options in its discussion paper is to facilitate such loans with no repayment of principal requirement, so long as interest is charged.
It’s pleasing to see that at least one of our previous year’s recommendations has become a reality: loss carry-back for corporate entities. At the time of writing, no legislation has been released, but this measure is proposed to apply as from 1 July 2013.
Being an election year makes this year’s Federal Budget an interesting exercise. The Government will need to continue to curtail spending in the face of falling tax receipts unless its fortunes turn around. Let’s hope it is able to navigate through all these challenges responsibly.
