Small biz in Swan's surplus sights

A recent tax victory by the Pratt family was an embarrassing failure for the Tax Commissioner. So if Swan hopes to use a tax avoidance crackdown to achieve a budget surplus, SMEs will be an easier target.

At the weekend Australia took a clear step towards an election by March. And the Pratt family gave Tony Abbott a peep as to how he could win it thanks to a massive tax victory in the courts.

When Wayne Swan announced his October mini-budget, the so called MYEFO, Alan Kohler and I, without any consultation, came to the same conclusion – there had to be an early election (Gillard has six months to go to the polls, October 24 and Prepare for an early election, October 24).

The decision by Wayne Swan to drain $8 billion from the working capital of corporate Australia (including $5.5 billion in 2012-13) will have severe ramifications on the economy. And the claimed budget 2012-13 surplus was a fiction because the mining tax estimates were way too high and were punting big rises in iron ore and coal prices.

At the weekend Deloitte Access Economics confirmed that the shortfall in the mining tax would be massive. (Deloitte Access estimate it will raise $500 million leaving a $1.5 billion budget shortfall).

ALP people have understood the mining tax fiction for some time and, given the latest favourable opinion polls, are already preparing to give Gillard the option of an early election. The Coalition is now also moving back to election alert.

As the officials worked on these preparations, neither party gave a second thought to the win by the Pratt family in a decade long tax case that stems from the Pratt’s Visy group takeover of the packaging assets of Southcorp.

The court loss will probably cost the commissioner between $50 million and $100 million. But more important than the money is the fact that the Australian tax office has now experienced once again that fighting tax claims against big organisations is high risk because big corporations have the money to fight. And for the most part in major issues they have taken the best possible legal advice before taking the action.

Last month’s mini budget gave the tax office a $309 million fighting fund and incorporated into the estimates the belief that if the tax commissioner spent that money attacking business it would yield $2 billion in extra tax revenue over four years (Six ways the taxman cometh, October 23).

The tax office will not get that money out of large corporations. As I pointed out at the time, that $390 million will be spent attacking medium sized and small enterprises, plus small superannuation funds that do not have the money to fight.

We have seen in independent contracting that the commissioner is quite prepared to levy tax on the basis of dubious legal foundations knowing that the small business unfortunates do not have the money to fight.

At the last election, on different grounds, the small and medium business issue was there for Tony Abbott to fight. His advisers did not understand it, and he failed to take advantage of his position and partly as a result lost the election. Two years later Abbott has a much better appreciation of small and medium enterprise Australia, but I am not sure that his advisers understand the impact of the attack the government is planning on Australia’s largest employer group.

As in 2010, small and medium business can deliver the election if motivated. If it is not motivated, its vote is scattered. The IR legislation hit smaller enterprises hard. At this stage they do not understand that the $390 million tax attack has them as the target.

There is no doubt that many smaller and medium sized enterprises avoid tax and are legitimate tax targets but the Coalition has a policy to enable smaller enterprises to seek redress outside the court system, against unfair actions by the public service. The Coalition also plans unfair contracts protection aimed at protecting smaller enterprises against unfair contracts.

Abbott will need to start now in pressing this advantage because a fear campaign can’t be mustered in the final weeks of an election campaign.

Footnote: My colleague Alister Drysdale has a different view point and does not expect an early election (Abbott’s changing the sermon, November 5).