Grant Chapman (SA, Liberal Party) Share this | Hansard source

This evening in this cognate debate I particularly want to support the Tax Laws Amendment (Small Business) Bill 2007. The main objective of the bill is to make it simpler for small business to determine eligibility for small business tax concessions.

In October 2005 the Prime Minister and the Treasurer announced the appointment of a task force to identify practical options for alleviating the compliance burden on business from Commonwealth government regulation. The task force was to examine ‘those areas in which regulation should be removed or significantly reduced as a matter of priority’. On 7 April last year the task force released its report, and recommendation 5.43 stated:

The Australian Government should take steps to align and/or rationalise different definitions in the tax law including ‘small business’, ‘employee’, ‘salary and wages’ and ‘associate’.

The government’s response agreed in principle with this recommendation.  It noted that the 2006 federal budget increased various thresholds applying to small business tax obligations. On the recommendation of the Selection of Bills Committee, the Senate referred this bill to the Standing Committee on Economics, of which I am a member, for inquiry and report by 6 June this year. Our committee received a submission from the Small Business Development Corporation and I thank the corporation for its input and the committee secretariat for its work in relation to our inquiry on this very important legislation.

In the last decade the Howard government has recognised and supported small business very strongly.  Australia’s small businesses are vital to our economy, accounting for 58 per cent of employment growth over the last six years.  There are more than 1.2 million small businesses in Australia and they employ 3.3 million people. Over the past decade the number of small businesses has grown 3.5 per cent each year on average. This sector generates 30 per cent of our economic production. Forty per cent of all Australian small businesses are in regional areas. That is a very important aspect of small business.

The changes in this bill, together with the new small business entity framework, significantly increase the ability of small businesses in my home state of South Australia to gain access to various small business concessions and to reduce compliance costs, which is a major factor for businesses wishing to access these concessions. While large employers, big businesses, frequently get the majority of media headlines, in reality it is the small business sector which forms the backbone of South Australia’s economy. The mining boom is creating wealth, but small business is the driving force in many regional communities across my home state. Small businesses which employ fewer than 20 people make up more than 96 per cent of South Australian firms and employ 235,000 people—more than half of our state’s workforce. Many of South Australia’s 80,000 small businesses also have growth potential.  The changes that this bill brings about will further increase the size and efficiency of the small business sector in South Australia.

These changes will reduce the compliance costs for many Australian small businesses. They will substantially simplify the tax law to make it easier for small businesses to determine eligibility for a number of concessions, and they are part of this government’s 2006-07 budget announcements.

This bill introduces a standard eligibility criterion that applies across the small business tax concessions. Entities that satisfy an aggregated turnover test of $2 million per annum are able to utilise those concessions that meet their business needs—if they also satisfy any additional conditions, not related to the business size, that currently apply to those particular concessions.

This bill also implements several 2006-07 budget announcements: the increase in the capital gains tax maximum net assets threshold from $5 million to $6 million, the extension of the rollover relief available under the uniform capital allowance system to small business entities, an increase in the simplified tax system—STS—turnover threshold from $1 million to $2 million, the removal of the $3 million depreciating assets test from the STS eligibility requirements, and an increase in the goods and services tax cash accounting turnover threshold from $1 million to $2 million.

The current tax laws contain a number of special arrangements for smaller businesses, defined in a number of ways. In the past, there have been different threshold criteria for determining what is a small business for particular concessions. The differences, albeit sensible when considered individually, have been a source of complexity and unnecessary compliance costs for small businesses. This bill amends the income tax law to create a single definition of ‘small business’, based on aggregated annual turnover of less than $2 million. Entities that do not meet the small business entity definition can still test their eligibility for small business concessions according to existing methods for capital gains tax, fringe benefits tax and pay-as-you-go instalments.

The Australian Chamber of Commerce and Industry has welcomed the changes, as has the Council of Small Business Organisations of Australia, as the new definition replaces a set of complex and hard to understand rules, with each tax having a different test for small business. I have read out the tests; there was a multiplicity of less than $1 million through to $10 million under the previous regime. They are now all consistent. The Institute of Chartered Accountants, which recently published its own research on the small business definition in tax law, has welcomed the change. The institute has said that these changes would improve access to tax concessions and reduce compliance costs, which will also have flow-on benefits to business.

The new definitions build a strong platform of tax initiatives that this government has delivered for small business. This strong platform includes the entrepreneurs tax discount, which is delivering $1.2 billion in tax cuts for more than 500,000 small businesses, enabling them to reinvest in their business or take a well-earned dividend. The government also has directed the Board of Taxation to inquire into where small business compliance costs can be further cut. So the government is on the job—moving ahead, changing tax law, simplifying the process and requiring the Board of Taxation to make further inquiries where further improvements can be achieved. The board is a consultative board—it is not owned by the Commissioner of Taxation—and it is comprised of people who have a knowledge of small business and can assess whether the changes are beneficial.

There are currently separate eligibility tests for the goods and services tax, the simplified tax system, the capital gains tax, the fringe benefits tax, pay-as-you-go tax instalments and small business concessions. This bill is about making things easier for small businesses in Australia by getting rid of those separate eligibility tests. The bill will standardise the eligibility criteria for small business tax concessions from 1 July this year. It will create just one eligibility test to obtain a range of small business concessions. Any business—subject to satisfying existing eligibility criteria not related to business size—with an aggregated annual turnover of less than $2 million will be eligible. The bill will allow small businesses to choose the concessions that meet their business needs. Businesses will not be obliged to adopt any concessions not suited to their particular requirements.

The concessions include a 15-year asset exemption from capital gains tax, a 50 per cent active asset reduction of capital gains tax, a retirement exemption from capital gains tax, rollover provisions for capital gains tax, simpler depreciation rules and trading stock rules, immediate deductions for certain prepaid business expenses, the choice to account for goods and services tax on a cash basis, and the choice to pay GST by instalments. The concession is also an annual apportionment of input tax credits for acquisitions and importations that are partly creditable. The bill provides for a car-parking exemption from fringe benefits tax, and pay-as-you-go instalments based on notional tax. There will be a two-year amendment period for the implementation of this bill.

The bill includes other elements. The existing eligibility thresholds for accessing capital gains tax, fringe benefits tax and pay-as-you-go instalment concessions will be retained. As I mentioned earlier, the bill will increase the maximum net asset value test for accessing capital gains tax concessions from $5 million to $6 million. And it will extend the rollover relief available under the uniform capital allowance regime to any business with a turnover of less than $2 million that chooses to deduct amounts for depreciating assets. So the bill makes a number of concessions for small business. It demonstrates the government’s continued commitment to reducing red tape and compliance costs for small businesses.

Small business brings great benefits to Australia. Businesses with fewer than 20 employees is the usual definition for ‘small business’, and there are approximately 1,888,000 small businesses in Australia. Ninety-six per cent of all businesses are small businesses with fewer than 20 employees. It is estimated that 39 per cent of Australia’s economic production is generated by the small business sector. Small businesses provide employment for some 3.7 million people—that is, almost half of all private sector employment is in small businesses. Those figures exclude small business employees in the finance and insurance industries, of which there are also large numbers. The growth in small business was approximately 25,700 in 2005-06, so small business is, indeed, on the march.

Since June 2003 the number of employing small businesses has grown by 31.7 per cent. Small business exits are not necessarily due to bankruptcies or problems; a huge number are for positive reasons, and possibly only 2.5 per cent exit due to lack of financial success. This is an excellent result and of course reflects the strong economy resulting from the Howard government’s sound economic management. Small business, as a result of our strong economy and its own initiative, is growing fast, having great success, employing about half of our population and having a positive result on the economy. Interestingly, 96 per cent per cent of small business owners have a computer and 90 per cent are connected to the internet. So there is a high degree of dependence on technology in small business today.

I referred earlier to the economics committee’s examination of this legislation. We received a submission from the Small Business Development Corporation, an independent statutory authority established to assist small businesses in Western Australia. This corporation supported the bill and noted that the single definition of small businesses is consistent with its recommendation to the Commonwealth regulation task force in November 2005. The corporation argued in its submission:

... the proposed amendments will be beneficial overall to many small businesses ...

And:

... it is unlikely that any small businesses would be worse off under the proposed Bill as no additional compliance burden should be created.

Having said that, and having indicated my strong support for the legislation, I also indicate that I am extremely concerned about an issue raised with me in relation to this legislation by a leading national advisory firm. This issue is that land-holding entities leasing a parcel of land to a related entity to conduct a business—which is a relatively common structure, especially in the case of farming enterprises—are not regarded as small business entities in themselves and therefore will not come under the extension of the alignment of the eligibility criteria. I believe this is quite unacceptable. Many farmers hold their land in a separate entity for valid asset protection reasons, while having another entity to conduct their farming enterprise. These entities are all related. There is absolutely no valid reason for excluding the asset-holding entity from the benefits of this legislation.

I believe the government must have another look at this issue. They must extend the new rules to those entities who hold assets that are leased by a related entity to conduct the business and must change the legislation to allow those entities to access these provisions. As I said, this is particularly important to the farming community. Many farmers these days hold their land assets in entities separate from those from which they conduct their farming operations. It is grossly unfair for farmers not to be able to access these concessions simply because of that asset protection provision which they maintain. Having said that, I support the legislation but I strongly urge the government to reconsider this matter and in short order introduce an amendment to allow the issue that I have raised to be solved.