The current tax system is a nightmare for small business. Let's hope the Federal Government review will eliminate many of the issues.
I'm sure we all experience frustration from time to time with the cost and complexity of the regulatory systems we have to deal with either as SMEs ourselves or on behalf of our SME clients.
Indeed, the tax system is riddled with rules that make an art form out of convolution. Anyone who has ever worked through the tax provisions in relation to entertainment will have experienced the mind-numbing minutiae of the various permutations and combinations of deductible/FBT able; deductible/non FBT able; depending on whether it was meal entertainment; who was entertained; where it took place; how much it cost; how regularly it occurred; whether it was associated with a business trip; whether alcohol was involved; whether it was part of a seminar and how long it went for; what they had for breakfast…(only joking – but just for the last one). I am embarrassed to send my clients the two-page matrix that is required to explain the rules provisions.
The trust loss provisions are of a complexity that seems totally out of proportion to the risk to revenue they are apparently aimed at and carry, what must be, the unintended consequence of denying the use of losses to many people who, in all equity, should be entitled to access them.
The tax consolidation rules are so complex as to be effectively inaccessible to most SMEs. But nothing in the Federal tax system can rival the complexity that arises in dealing with the combined application of state and territory regulations.
Take, for example, the application of stamp duty to a simple sale of business assets. The first problem is that it applies in every state and territory but not to the same degree. Some states (Queensland) charge stamp duty on the transfer of all business assets; Victoria only charges it where assets are associated with the sale of real property and some states charge it only on goodwill. And it doesn't matter if the business doesn't have offices in another state; if it makes sales to interstate customers you will still have to deal, at least, with stamp duty on debtors and good will if that particular state charges stamp duty on those assets. In order to work out the allocation of the value of goodwill you need to have a three year break-down of the sales of the business for each state. Debtors also need to be allocated to a state but the basis of allocating debtors may be different from the basis of allocating sales; for example, if the debtor's billing address differs from the location the goods were shipped to. And of course each state has its own method of collecting the stamp duty. In some cases there is a form to lodge – in others you have to write a letter to the relevant state revenue office and attach the contract of sale and all the other details and documentation they require. (There is no self-assessment.) The timing for submission of the documentation ranges from state to state from one month to three months from the date of the transaction.
All this generally requires the engagement of a professional person charging at a, usually substantial, hourly rate – and there are no de minimis levels. So someone buying even a small business still has to deal with this myriad of inconsistent rules if the business sells to customers outside their state. As we know, adviser's costs do not reduce proportionately with the number of zeros in the purchase price.
The stamp duty regime is out-dated, cumbersome and inappropriate for a country that is serious about attracting international investment. It is not even the amount of the stamp duty liability that is the issue. It is the complexity of complying with up to eight very disparate regimes in relation to a single transaction. I was recently involved with an acquisition of quite a small business by an overseas company whose CFO could not understand why the process of paying relatively insignificant amounts of stamp duty could be so time-consuming and cost so much. (To add to his bemusement he then had to absorb the concept that payroll tax was, indeed, a tax on payroll and not just the tax you deduct from employees' salaries.)
The Federal Government's current tax review, with a scope that encompasses state taxes, has the chance of addressing problems like these. Past efforts at getting some consistency between state regulations– such as the recent harmonisation of payroll tax legislation and the less recent attempt to harmonise stamp duty have had limited impact, and we should; not confuse harmonisation of legislation with consistency in either the application of the taxes or in dealing with the individual revenue authorities.
For the sake of being able to offer a streamlined efficient tax system that a modern internationally- competitive economy requires we have to make some big changes. These should include a radical overhaul of the archaic mess that is currently created by nine regulatory regimes.
Let's hope this opportunity does not pass us by.