In assessing Tuesday’s federal budget, the Gillard government has received strong business criticism for pulling out of their promise to lower the corporate tax rate. I’m not joining that criticism. From the small business perspective the corporate tax rate is only relevant for a comparatively low number of small business people. What is relevant for the vast bulk of small business people is the personal income tax rates.
The Gillard government’s lowering of the personal tax rates in this budget should be seen as small business positive. Look at the numbers.
Of the 2.4 million or so small businesses in Australia around 700,000 are incorporated. For the remaining 1.7 million unincorporated small business people, the corporate tax rate is irrelevant.
Further, of the 700,000 incorporated, most pay income from their corporate entity to themselves personally, so they pay tax at the personal income levels. It's only when a small business has reasonably high profit (pick a figure, say $300,000 plus?) that it makes sense to retain a portion of profit in the company and pay tax at the corporate rate. The numbers in this category are not comparatively large.
Last year's budget announcement that the corporate tax rate would be lowered to 29 per cent was sold as a big plus for small business. It wasn’t. It was essentially a medium to big business issue.
Further, last year the government removed tax incentives (the entrepreneurs' tax offset) for the lowest income small business people. The government had effectively taken money from low-income earners and given it to high-income earners. I criticised this last year as Labor corrupting its own principles. This year they have partly corrected that.
In this budget the Gillard government is (again) selling a big business tax change as small business friendly. The ability for corporate businesses to take up losses from a prior year and offset the losses against a current years profit is a good move. But, again this is only of potential value to the 700,000 small businesses that are incorporated. The 1.7 million sole traders and partnerships receive no advantage.
Further, the dynamic of small business is that if losses are being incurred this tends to crunch on for several years. A sudden flip into substantial profit is not normal. Most (incorporated) loss making small business won’t have substantial profits to offset against previous losses. The Gillard government’s attempt is good, but they consistently display a lack of understanding of small business realities.
The loss carry-back policy is primarily good for big business. But the government’s attempts to sell it as ‘small business’ is weak and somewhat misleading.
Yes, there is small business relevance in the immediate tax write-off of $5,000 for a car purchase, announced in the budget. For a small business person needing to buy a vehicle this will be helpful. Similarly the $6,500 asset purchase write is good for small business people looking to invest back in their business.
On balance the tax side of the budget is a bit small business ho-hum. There are some good things but the government tries to oversell. It presents essentially big business tax items as small business items then misses the selling points it could promote, for example lower personal tax rates. The consequence is a Gillard government looking like political scammers in the eyes of small business people.
This positioning of the government is further reinforced by the commitment to on-line and other small business promotion services. They’re spending $27 million on a centralised call centre service providing advise on dispute referral services and so on. That’s all good but primarily the service will refer people to dispute mediation services in the states. It won’t assist dispute resolution itself.
Then there’s $8 million for the new federal Small Business Commissioner. I criticised this when it was announced because it’s a commissioner with no powers, a ‘gum flapping’ exercise I think I called it.
What has happened is that the government is focused on politics. It’s recognised that it must pull back some of the small business vote if its to have any chance of survival. The personal tax rate reduction deserves a tick but the government doesn’t seem to recognise this. Mostly they’re fiddling at the edge. They still don’t ‘get’ the social and economic transformation from a managerial to an entrepreneurial society that needs structural addressing.
Or maybe they’re just flapping around. On Monday night, 24 hours before the budget, the Small Business Minister was interviewed on Lateline Business. When asked what the government was doing for small business he touted the reduction in the corporate tax rate as the success. Obviously someone forgot to tell that within a day that policy was to be dumped. And this Small Business Minister is in Cabinet! This hardly inspires confidence!
Ken Phillips is executive director of Independent Contractors Australia, and author of Independence and the Death of Employment.
Gillard's SME-sized budget confusion
The federal budget holds some positives for big business, but Labor's attempts to sell them as small business boosters are weak and betray its lack of understanding of small business realities.
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