Outcomes from the Review of Small Business Tax Impediments

Transcription

1 February 2015 Outcomes from the Review of Small Business Tax Impediments The Government has released its response to the Board of Taxation's Report on its Review of Tax Impediments Facing Small Business. In our view, the Board has done a great job in conducting its review but it is disappointing that some issues have been labelled as medium to longer term ones as they could potentially create substantial benefits from a red tape reduction perspective and should be considered in the shorter term. Summary The Government has released its response (click here) to the Board of Taxation's Report on its Review of Tax Impediments Facing Small Business [ the Report ] (click here). The objective of the Report was to provide options for simplification and deregulation of the small business tax system; to identify aspects of the tax system that unreasonably impeded the goals of a broad cross section of businesses; and (in particular) highlight tax impediments to small businesses growing into medium and large businesses. Our view On the whole, the Board has done a great job in conducting its review. While a lot of issues were considered in the (126 page) Report, the Board took a sensible and pragmatic approach by classifying issues into what it believed could be dealt with by the Government in the short, medium and long term. This approach appears to have made it easier for the Government to agree to address almost all of the issues labelled as short term. As most of these short term issues required administrative solutions (for example, creating simplified tax returns or extending certain lodgement dates), it is also very pleasing to see that the ATO is supportive of these measures. So much so, that the ATO has already begun to implement a number of these administrative fixes whilst also agreeing to implement others as soon as practicable. This is very reflective of the new ATO approach to working with taxpayers. However, we note that the meatier taxation issues (outside of tax administration) have not really been addressed. Instead, while certain recommendations have been made, these have been labelled as medium to longer term issues that will likely be considered as part of the Tax White Paper process (coupled with a subsequent small business tax review). On some of these issues this is a little disappointing. For example, there are no recommendations that have been accepted with respect to addressing issues associated with the CGT small business tax concession. While we agree that these issues require further consideration, the proposed medium to long term process could take more than two to three years to complete (and could be subject to an election). Similarly, in the case of FBT (where there is a recommendation to increase the FBT exemption threshold from $300 to at least $500), it is unclear why such a simple change needs to be taken to a White Paper review. We therefore believe that a number of these important recommendations should be brought forward and considered in the shorter term, which could potentially create substantial benefits from a compliance (or red tape reduction) perspective.

2 Detailed discussion The following section provides detail on some of the areas considered in the Report, the recommendations made with respect to those areas and the proposed manner in which those issues are likely to be addressed. 1. Australian Business Number [ ABN ] processes The Board considered a number of technical difficulties associated with obtaining an ABN, including the qualification requirements for small businesses (particularly sole traders) where they may not be considered to carry on an enterprise. Many of these issues were short term administrative issues. To address these issues the Board recommended (Recommendation 4.1) that the ATO update its guidance material (MT 2006/1) to make it easier to satisfy the qualification requirements where a taxpayer intends to carry on an enterprise. Furthermore, the Board recommended updates to the ABN application process. The Government accepted this recommendation and noted that the ATO had already started work. The Board also recommended (Recommendation 4.2) that the ATO provide a hotline so that taxpayers can follow up important applications. Again, the Government accepted this recommendation and noted that the ATO will investigate this option further. Finally, while not a recommendation, the ATO agreed to review the disclaimer on the ABN Lookup tool so that users (acting in good faith) can rely on the result of an ABN search. 2. Employee / contractor online ATO decision tool A number of submissions to the Board raised concerns with the operation of the online decision tool developed by the ATO to assist taxpayers to work out whether an arrangement with another entity gives rise to an employment relationship for taxation purposes. In particular, two concerns were highlighted in the Report: (i) the online tool automatically determines that a person is not an employee if they are working through an interposed company or trust even though this may just be a payment by direction which does not alter the character of the underlying relationship; and (ii) the tool does not deal well with the different definitions of an employee for taxation and superannuation purposes with the result that a worker can be classified by the tool as a contractor for taxation purposes but still be an employee under the superannuation rules. The ATO has taken feedback on the Employee / Contractor decision tool on board and is undertaking a review of its operation. The Board commended the ATO for this response and recommended (at Recommendation 4.3) that the ATO considers: (i) how the tool could provide more guidance where a person is working through an interposed company or trust; and (ii) incorporating into the tool guidance on whether a person is an employee for superannuation purposes.

3 3. Personal Services Income rules The alienation of Personal Services Income [ PSI ] rules seek to prevent individuals from reducing their tax liabilities by diverting income from their personal services through an entity (such as a company or trust) or through payments to associates, including family members. Whilst the PSI rules are not intended to affect individuals or entities operating a genuine personal services business, the Board noted that a number of submissions raised issues regarding the complexity, uncertainty and compliance burden associated with the way that the rules operate. The ATO advised the Board that it was not aware of any evidence that suggests that the rules inappropriately apply to bona fide businesses but to assist taxpayers it is developing a prototype online decision tool to determine if they are carrying on a personal services business. The Board commended the ATO for developing this prototype and recommended (at Recommendation 4.4) that: (i) the ATO continues to develop the tool; (ii) the tool should incorporate material that clarifies what the result means for the taxpayer; and (iii) where the tool is used in good faith it should provide protection from the imposition of penalties where the user relies on the outcome. The Board also recommended (at Recommendation 4.5) that, in addition to the decision tool, the ATO should examine ways to better explain the PSI rules and how they apply. 4. Opportunities to reduce the transfer pricing compliance burden for small businesses The transfer pricing rules are intended to ensure that transactions between related parties are priced in accordance with the arm s length principle and apply to all businesses with related party cross border transactions or arrangements, irrespective of the size of the business. Many advisers and professional bodies, including us, have submitted that safe harbours should be included in the transfer pricing rules so that they do not apply to small businesses. The Board recommended (at Recommendation 4.9) that the ATO develops guidance for small businesses to provide some certainty as to the documentation requirements for transfer pricing transactions. In particular, the Board recommended that the ATO should outline its expectations for small businesses when they are sourcing benchmarking data to support transfer pricing transactions. We note that the ATO has already taken some action in this area with the release late last year of an on line guide entitled Simplifying transfer pricing record keeping setting out simplified transfer pricing record keeping options so that eligible taxpayers can minimise their documentation obligations and compliance costs. The simplified transfer pricing record keeping options are available for Small business taxpayers, Distributors, Intra group services, and Low level loans. Taxpayers not covered by one of these simplified record keeping options are expected to contemporaneously document their relevant related party dealings.

4 The ATO has stated that it will not allocate compliance resources or take other compliance action to examine the transfer pricing records of taxpayers who have self assessed as being eligible for one or more of the simplified record keeping options. 5. Small Business FBT compliance burden and increasing exemptions The Board highlights that FBT creates a significant and disproportionate compliance burden for small businesses. Accordingly, the Board has recommended (Recommendation 5.7) that there be an increase to the minor and infrequent threshold from $300 to (at least) $500. In our view it is unfortunate that the Government has not already accepted this recommendation rather than opting to consider it as part of a broader review of FBT in the context of the Tax White Paper process. The Board has also recommended (at Recommendation 5.8) that there should be an investigation of the possibility of aligning the FBT year to the income tax year. We see a lot of merit in considering this option, which would help to reduce the requirement to effectively calculate FBT two times a year (at 31 March for the FBT return and 30 June for the income tax return and accounts). 6. CGT issues for small business The Board makes a number of comments and observations on issues raised in submissions concerning the impact of CGT on small business taxpayers. The Report goes on to discuss a number of possible CGT reforms to assist the small business sector. In particular, the Board has recognised that the rules governing eligibility for the small business CGT concessions are exceedingly complex and difficult for small businesses to navigate and has suggested that further consideration be given (over the longer term) to reforms to: (i) better target the concessions; and (ii) eliminate the disincentives and unfairness associated with the current rules. For example, the hard cut offs for the small business entity turnover and net asset value tests mean that some businesses are able to access the CGT small business concessions while slightly larger entities receive no benefits under the concessions. Accordingly, these hard cut offs give rise to many disputes with the ATO where entities are on the borderline with respect to their size and their ability to access the concessions. The Board acknowledges that submissions asking for the CGT concessions to be tapered off when thresholds are exceeded may address the existing hard cut off issues. However, it felt that this may be complex and difficult to implement thus the Government is now likely to only consider this as part of the White Paper review. We believe that this issue warrants further examination prior to the White Paper review. In our view, this measure should be considered as part of the Budget for 2015/16, as the effect of this change will be substantial in reducing complexity (and thus compliance costs) for small business. Pitcher Partners will be making a separate submission on this point to the Government to advocate change in this area.

5 7. Other options for reform Chapter 7 of the Reports looks at taxation issues that were out of scope for the review but were raised in submissions including State taxes, the taxation of trusts, totally removing the FBT regime, the treatment of tax losses and creating a new small business entity. Notwithstanding the fact that they were out of scope, the Board made a number of observations in relation to some of the issues. For example, the Board stated that it: (i) strongly supports the harmonisation of the payroll tax rates and thresholds across the states and territories; and (ii) considers that a central administrator for payroll taxes is worthy of consideration on the basis that it could significantly reduce compliance costs. The Board also agreed that the issue of whether the same business test in the tax loss rules is overly restrictive is worthy of further consideration in the longer term. 8. Priorities for reform Chapter 8 of the Report prioritises the Board s recommendations having regard to their ease of implementation and how long they are likely to take to implement. In this respect, the Board believes that a number of its recommendations are priorities from a short to medium term administrative perspective (such as the Employee / Contractor decision tool and Transfer Pricing compliance obligations) whilst others are either short to medium term legislative priorities (including raising the minor and infrequent threshold for FBT purposes) or priorities over the longer term (such as a fundamental review of the Small Business CGT concessions). As noted above, we believe that a number of the issues raised and recommendations provided can be implemented fairly easily in the short term and thus Pitcher Partners will advocate a fast tracking of such issues. It would be disappointing if recommendations that would be relatively easy to implement are taken to a White Paper review. A separate submission is currently being prepared to the Government on these items.

6 Further information Please ask either your regular Pitcher Partners contact or any of the contacts below for further details on the issues raised in this CPN Bulletin: Melbourne Sydney Alexis Kokkinos Scott Treatt Partner/Executive Director Tax Consulting Partner Tax Consulting nsw.com.au DISCLAIMER: This bulletin is intended to provide a general summary only and should not be relied on as a substitute for professional advice.