A taxing question for small business

If the Australian government is serious about encouraging small business, its approach needs to move away from broad-based tax concessions towards financial support linked to innovation, according to a Flinders University business academic.

Associate Professor Paul Kenny has just published Small Business Tax Opportunities as a guide for tax practitioners, students and small business owners to the current system of tax concessions.

He said small business owners need to be aware of the new $2 billion of tax concessions that have lifted the level of asset write-offs from $1,000 to $6,500, increased the depreciation write-off rate for most other assets from five per cent to 30 per cent, and introduced a $5,000 deduction for acquiring a motor vehicle.

Associate Professor Kenny urged small business owners to seek professional advice to avoid missing out.

He said occupying a business premises rather than renting it out, for example, can entitle the owner to an exemption from capital gains tax when the property is sold.

“People have paid  hundreds of thousands of dollars in tax which they needn’t have, for lack of good advice.”

But Associate Professor Kenny also says that one of the system’s basic flaws is that the cost of advice can virtually negate the benefits for smaller players, producing an “upside-down effect”.

“Unfortunately, it seems to be the wealthier small businesses that can afford to get the good tax advice which get the concessions,” he said. “It is also the wealthier small businesses that hold all the depreciating assets, the real property that gets the capital gains and obtains all the benefits.”

While urging small businesses to claim the concessions, Associate Professor Kenny said recent regimes of tax reform – the Ralph report of 1999 and the Henry review of 2008-2009 – did not fully  analyse incentives for small business.

In contrast with the research-based recommendations of a recent independent tax review in the UK, Australia’s system of concessions was “plucked out of the air”, Associate Professor Kenny said.

He said there are major doubts about the policy rationale of the concessions system. As well as fundamental problems of defining and measuring what a small business is – criteria vary between government departments – Associate Professor Kenny said that once a business grows beyond certain parameters, it ceases to be eligible for the concessions.

“This tends to stymie growth, rather than encourage it.”

Associate Professor Kenny argues that direct grants tied to innovation would be a more effective method to encourage small business and its role as an economic driver.

“It isn’t easy for a government to work out which businesses are innovative, but we certainly need better targeting than the blunt instrument that is the  small business tax concession,” he said.

“America has had for 26 years a small business innovation research program that gives $2 billion in grants per year, and studies have shown that this has had a significant impact on capitalising a broader economic transformation in innovation that flows through the general economy.”

Small Business Tax Opportunities is published by LexisNexis.

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