If the political fairy godmother granted me 6 wishes - a bit greedy I know - this is what I would wish the Government would do for SMEs.
1. Encourage the banks, by whatever means available, to free up funds to lend to SMEs. Recent research has found that access to funding for growth has become a major concern for business owners. It is all very well to adjust the company tax rate by one or two percent but this is of negligible value compared to being able to grow the top line. Our SME sector employs around half of our workforce. We need SMEs to develop and most need funding to do it.
2. Encourage investment in technology to promote efficiencies and international competitiveness. The ‘general business tax break’ should be extended and focussed on capital investment in equipment and IT that will improve productivity and support innovation.
3.SMEs have limited resources and having to comply with volumes of different taxes and charges is an inefficient and unproductive use of these resources.
The Henry Review’s recommendation to focus the tax system on a handful of efficient taxes instead a plethora of nuisance taxes is eminently sensible. If GST was included in the scope of a tax review imagine how streamlined a tax system we could have.
4. Trusts are structures used by SMEs for flexibility, asset protection and because they’re very suited to operate businesses and own assets as pooled vehicles on behalf of a family. Just because their profits are often distributed to companies and taxed at the company tax rate - to keep them competitive with businesses operating through companies - they should not be treated as tax avoiders. We just have to get rid of this emotive idea that trusts and tax avoidance are synonymous. It is mischievous, erroneous and has resulted in ill-conceived and poorly drafted legislation that is beyond the comprehension of those who legislate it, those who administer it and, particularly, those it is aimed at.
For example, the trust loss legislation which we have had for 12 years is still generally poorly understood. Further, it often denies the use of tax losses to the people who incurred them. It costs enormous sums for advisors to work through it, prepare the necessary elections and monitor future distributions to ensure all relevant beneficiaries fall within the definition of ‘family group’ - a term that has already proven tempting to politicians to redefine.
Companies are able to use their losses even if ownership and control changes as long as they conduct the same business - trusts are not even allowed this. A small business I know recently lost $1m of accumulated tax losses because one of the unitholders in the unit trust bought out the other - the business remained the same throughout. The legislation that made that happen is morally indefensible.
We must also have an end to the debacle relating to unpaid present entitlements and the enormous confusion in relation to trust distributions evidenced by the Bamford decision. We need fair resolutions to these issues that are also practical to administer. It is the SME sector that bears most of the cost of these arcane legal issues that add no value to the business.
5. One of the reasons trusts are so popular is that there is no other vehicle that can simply provide flow through tax and limited liability. The ICAA has proposed that a simple new company structure be introduced which taxes profits in the hands of the shareholders and also allows losses to flow through, obviating the need for much of the complexity of tax legislation in relation to deemed dividends, imputation and company and trust losses.
Whether or not any political party is prepared to take such a ground breaking step, something has to be done about the complexities of the tax rules that SMEs have to live with. The current system is broken but someone has to have a genuine concern for the welfare of our SME sector and the political will to do something that does more than play around the edges.
6. And let’s not forget my favourite. Would someone please amend the tax law so that SMEs can provide shares to key employees without someone incurring a punitive tax cost. Governments simply should not treat the provision of shares in a private company in the same way as listed company shares. Private companies often find it harder to attract and retain quality key staff and providing those key staff with shares is not the same as handing them a bag of cash - they may never be able to sell the shares, or, at least, not until they terminate their employment. The employees of SMEs should be able to obtain deferral of tax on discounted shares until they sell them - even if it is not under a qualifying (non-discriminary) employee share plan. This simple amendment would do much for the ability of SMEs to attract and retain quality managers to ensure a smooth transition for the current generation of retiring baby boomer owners of SMEs.
Is this really too much to hope for.