Craig Emerson (Rankin, Australian Labor Party, Shadow Minister for Service Economy, Small Business and Independent Contractors) Share this | Hansard source

The Tax Laws Amendment (Small Business) Bill 2007 provides some welcome relief for small business by simplifying the tax system in a number of significant respects. It introduces a standard eligibility criterion of $2 million in annual turnover applied across small business tax concessions. Prior to this legislation, the criterion for small business to gain access to a concession could have been $5 million or $6 million and in other cases $1 million or $2 million. The purpose of this legislation is to allow small businesses to access some of the concessions that are in the tax system for small business by standardising that criterion, wherever possible, to $2 million in annual turnover.

Labor understands and accepts that sometimes standardising criteria is simpler in theory than in practice. We recognise that we cannot necessarily standardise every definition of small business within tax legislation, but this legislation makes very substantial progress. The legislation also increases the capital gains tax maximum net assets threshold from $5 million to $6 million and introduces a number of other measures. The legislation removes the $3 million depreciating assets test from the simplified tax system eligibility requirements. That sounds technical, but essentially the purpose of this is to allow small business greater access to this simplified tax system. I will have more to say about that in a few moments.

Another provision of the legislation increases the turnover threshold for eligibility for the simplified tax system from $1 million to $2 million in annual turnover. Again, that will substantially increase the proportion of small businesses that can gain access to the simplified tax system. That is important because the simplified system offers benefits to small businesses by enabling them to group small assets and write them off either immediately or faster than would otherwise be the case. The purpose of that measure is to allow small businesses to keep more of their cash flow in the early years. It will not necessarily change the total amount of tax paid over the lifetime of those assets, but it will reduce the amount of tax payable in the early years and commensurately increase the amount of tax paid later, if the business is still operating. Small businesses want and need positive cash flow in the early years if they are to survive and thrive. Australian small businesses experience a high failure rate during their first two years of operation, and that is why the simplified tax system is attractive in principle.

However, there is a quandary. The shadow minister for revenue, the member for Prospect, pointed out that the accounting profession has estimated that only 20 per cent of eligible small businesses are availing themselves of the benefits of the simplified tax system. In response to questions during Senate estimates hearings late last year, government officials estimated that figure at 28 per cent. That is a similar order of magnitude. It makes one wonder why 72 per cent of eligible small businesses do not choose to access the system. While the government’s lifting of the eligibility threshold from $1 million to $2 million is welcome, it is well worth asking why so few small businesses are availing themselves of the opportunity to access a simplified system that includes accelerated depreciation and immediate expensing of some assets.

I do not believe we have any clear answers, and there were certainly none in the Senate estimates hearings last year. I note for the record that the government officials who were asked to provide more detailed answers on notice never did so. I fear that is part of a pattern of officials being instructed by the government not to provide basic information. I foreshadow that we will ask similar questions in the estimates hearings in the next fortnight. We do hope and expect that this time government officials will be more forthcoming so that we can get a better handle on why so many small businesses do not avail themselves of the simplified tax system.

There is a further measure in this bill, and that is to increase the goods and services tax cash accounting turnover threshold from $1 million to $2 million—again, this is meant as a simplification measure. This certainly does bring me to a discussion of various proposals for simplifying the GST bookkeeping burden on small business. Those proposals have quite a history, and most of them come from the Australian Labor Party. Back in 2000, as a backbencher I developed a proposal called ‘the ratio method’. The ratio method would allow small businesses to apply to the tax office for a ratio based on their historical financial GST performance and to have that ratio apply to future financial transactions, thereby quite dramatically simplifying the GST paperwork.

The government condemned this proposal at the time and said that it would not work. As a government it had just gone through a process of making some simplifications to the BAS bookkeeping requirements. You might recall that, around that time, there was a lot of small business anger and anxiety about the huge new paperwork burden being imposed upon them, and so some simplifications were made. This was a far more dramatic simplification, and I was amused when the then small business minister elicited a minute from the then Department of Employment and Workplace Relations and Small Business. I have managed to dust that off and I have it here today. It was not necessarily the minute that the minister wanted to receive. The minute commented on the ratio method:

A ratio by turnover method is a reasonable option for calculating GST as long as the ratio continues to be an accurate reflection of the net GST position of the business. As the actual turnover figure in a quarter is the basis for the calculation, it can be a sound means of reflecting seasonal or abnormal fluctuations provided the basic composition of a business’s trading circumstances does not change.

Hear, hear! Good on the department for making those observations about the ratio method. In fact the ratio method did contemplate circumstances where the business’s trading circumstances do change, in which case a new ratio was to be sought from the tax office.

In responding to this the Treasurer condemned it and said that it was a shocking idea and that small businesses would be forced to pay more in GST, even though this was an option—and it still is an option. It was always an option. But the Treasurer warned, ‘Watch out for the ratio method, because small businesses will have to pay more GST and there’ll be a loss to the revenue.’ So we had the Treasurer making claims in two breaths: in one breath he was saying, ‘Small businesses will pay more,’ and in the other breath he was saying, ‘The revenue will be adversely affected.’

While the government was condemning the ratio method it was quietly assembling the simplified accounting methods. The simplified accounting methods are a good concept and Labor supported simplified accounting methods. But we pointed out that simplified accounting methods are limited to mixed-food retailers. Mixed-food retailers are those who have some items for sale that attract GST and others that do not attract GST and/or have some purchases that attract GST and others that do not attract GST. Those are exactly the circumstances where the ratio method would apply. Those simplified accounting methods were limited to those circumstances of mixed-food retailers—small grocery and corner stores, fish and chip shops and so on.

The Banks report, commissioned by the government, said, ‘Why not extend the simplified accounting methods to small restaurants, cafes and catering businesses?’ What a good idea—and the government has indeed done that. We have called for the government to go further and extend it as an option to all small businesses with a turnover of less than $2 million. That is highly relevant because the government is standardising the definition of small business at around $2 million in this legislation. We called for that. There would be two broad ways of doing the calculations under what we were proposing. What we were proposing comes under the terminology of ‘BAS Easy’. BAS Easy would extend these simplified accounting methods to other businesses. In one approach under BAS Easy you would take two snapshots a year for a month: one in the first half of the year and one in the second half of the year. You would then apply the resulting ratio to GST sales for the rest of the year, hence the ratio method, hence BAS Easy.

We thought that was such a good idea and the Labor leader, Kevin Rudd, thought that was such a good idea that he announced in his National Press Club speech that Labor was circulating a proposal called BAS Easy. In response to Labor’s proposal was a story in the Financial Review of 26 April 2007 headed ‘Costello sour on Labor’s BAS sweetener’. So he did not seem to like it. Let me cover some of the statements in that article by Fleur Anderson. The article says:

Labor’s election sweetener to small business, to lift the burden of GST paperwork under its BAS Easy plan, was introduced by the coalition last year, Treasurer Peter Costello said.

So the Treasurer apparently does not like BAS Easy. He criticised it for five years but then he said, ‘I introduced it last year.’ The proposal that he condemned for five years the Treasurer said he introduced. The Treasurer said:

The simplified accounting method is available to businesses  with an annual turnover of up to $2 million, the same threshold that Labor says it will implement. It was developed in close consultation with industry and makes it easier for these businesses to meet their GST obligations and reduce their compliance costs.

Here is the Treasurer saying, ‘We’ve never liked this ratio method, we don’t like BAS Easy, but we implemented it a year ago.’ How amusing is this? COSBOA took a different position to the Treasurer, because COSBOA is full of praise for BAS Easy. In a release of 20 April, Tony Steven, the CEO of COSBOA, said that he welcomed the ALP proposal, called BAS Easy. He said:

For all small businesses working under a revenue threshold of 2 million dollars a year the BAS Easy system is a simple and practical answer to the current BAS red tape.

Taking an opt-in approach will allow those businesses that are working with few or no staff to adopt the new BAS Easy system and save time and effort should they so wish.

So there we have a small business organisation, COSBOA, welcoming BAS Easy, and the Treasurer condemning BAS Easy but saying that he had implemented it already. There was other praise for BAS Easy, too, but time will not allow me to go through all that praise. But here is the conundrum. The government did not in those changes in response to the Banks report extend BAS Easy—our proposal; the simplified accounting method, if the Treasurer wants to call it his proposal—to all businesses with a turnover of less than $2 million. However, in the budget, the Treasurer put out a press release which said:

The Government will allow more simplified accounting methods for small businesses. This will give more small businesses the option of using a simplified method to calculate their GST obligations if it suits their requirements. From 1 July 2007, any small business that makes mixed (taxable and GST-free) supplies or mixed purchases will be able to approach the Australian Tax Office (ATO) to discuss the development of a simplified accounting method for their use.

That is the ratio method. That is BAS Easy. This is the point: how could the Treasurer condemn BAS Easy for five years and then say he has already introduced it and then go to the budget saying, ‘Now I’m really going to introduce it,’ when what he has in fact introduced is a discussion, a chat, where a small business can go to the tax office? My concern is this: if this government were re-elected and a small business were to go to the tax office and say, ‘What ratio would you issue me?’, the government may well instruct or allow the tax office to issue a completely unfavourable ratio—one that no small business would go anywhere near with a barge pole. So what the Treasurer wants to do is have the benefit of being seen to simplify, or the appearance of simplifying, the GST bookkeeping burden and paperwork requirements for small business but not actually doing it. Only this Treasurer could design a GST that raises $185 billion in order to collect $37 billion. It is a very complex GST and one that imposes a disproportionate burden on small business.

In a special MYOB survey in January on the red-tape burden on small business—

See this speech in context