TAX REFORM ANALYSIS: Is your business impacted? (4/5)

JUNE 2010


The Rudd Government’s response to the pre-Budget recommendations put forward by Dr Ken Henry and his panel of finance big guns generated controversy on three key issues - company tax, superannuation and a resources super profit tax. The talk has been on big corporations, foreign investment and the miners, but a question looms over the outcomes for ground level SME, the engine room of our economy.

WITH eligible businesses enjoying a reduction in company tax and a $5000 depreciation allowance, the immediate impacts of the Henry tax review seems generally positive for Gold Coast SME’s.

Previously announced reductions to personal income tax thresholds continue to apply while from July 2011, tax payers will receive a 50 per cent reduction on the first $1000 of ‘interest’ income earned.

McLauchlan & Partners’ Andrew McLauchlan is quick to point out that any short-term savings on company tax will eventually be offset by the increase in superannuation guarantee payments.

“It’s only positive that we’re paying less company tax, though if you ask me if the reform in tax as a result of the Henry review will lessen the burden on small business, I’d say probably not,” says McLauchlan.

The cautious approach is echoed by Gamma Wealth director Brett Evans, who warns of possible future drawbacks and describes the Government as ‘cherry picking’ legislation.

“The biggest problem is that the Government has tried to cover too many bases. The last major tax reform in the 1970s tried to implement a similar number of policies and while they did put them all in place, it took 20 years,” says Evans.

“For example, one of the contributors to the Henry tax review relayed that along with the Resources Super Profits Tax, four or five other pieces of legislation should be introduced to soften the blow. The Government chose to pick out just the Super Profits Tax and in isolation it seems very raw.

“They want to roll out company tax reductions but they aren’t going to give money away, they’ll need to regain that (funding) somewhere. Little things could be implemented to gain that back as the tax review wasn’t meant to decrease Government revenue only the way they raise that revenue.”

Underwhelming changes

The Henry Tax Review put forward 138 recommendations and some financial advisers are labelling the Government’s decision to look at implementing just four as ‘underwhelming’.

HLB Mann Judd partner Janelle Manders, agrees the review would have been more significant had additional recommendations been implemented.

“The sad thing about the Henry Tax Review is that it was a good comprehensive analysis that provided a number of incentives for small business going forward in Australia, but what the government has done by pulling out bits and pieces is lessen its impact,” she says.

“What has been implemented have been positive changes for SME’. The reductions in company tax to 28 per cent will prove important but really there are not a lot of incentives for growth.”

WMS senior portfolio manager Brent Bevan says: “Aside from the resource tax, a few minor tweaks and the implementation of previously announced personal tax threshold changes, that is effectively it for the current round of ‘tax reform’ - hardly major at this stage and it’s hard to envisage these proposals having any material effect on tax compliance time and costs for the average business.

“Despite the closing of some doors, many remain open, with the Government yet to respond to a wide range of reform proposals surrounding personal taxation, superannuation and social security. The primary focus of almost all these proposals is the simplification of our tax system and taxation compliance requirements.”

Crosbie Warren Sinclair/BAMR wealth management partner Mark Alexander, disagrees with Evans that long term drawbacks are certain for SME’s, but with the upcoming election is doubtful of the seriousness of some of the ‘favourable’ Budget policies.

“It was a light weight Budget let’s face it. Most of the policies were just reaffirming what was already announced a week earlier following the Henry tax review,” he says.

“The thing to remember is that none of the proposed reforms have been implemented yet, and even the first is still a couple of years away.

The Government plans to increase super guarantee payments from 9 per cent to 12 per cent by 2019/2020 – in that time we may have gone through three different governments. The budget we’ll really be interested in will be the first one after the upcoming election.”

Resources tax the new political football

The upcoming federal election campaigns will see both political teams scoring goals from the controversial Resource Super Profits Tax (RSPT).

But as federal Opposition Leader Tony Abbot declares war on the RSPT, the consensus among the finance industry is that the full effects on business are yet to be impacted.

McLauchlan is the least critical, saying the underlying intent of the tax is to take control of the large profits that foreign investors are reaping from the lucrative Australian resources industry.

He admits that in practise it could be a different story.

“I don’t even think the legislators have an idea of how big the effects will be,” he says.

“The problem is the Government can’t discriminate against the foreign-owned companies and only tax them and not the Australian-owned miners. Even if they did implement a policy like this, I’m sure foreign investors would find a loophole in the system.”

Brent Bevan says the ‘Robin Hood’ approach sounds plausible in theory, but the implications extend far beyond the corporate profits of the mining giants.

“In its current form, this tax has the unintended potential to influence, aka increase, the price of everything from vegetables to electricity, affecting not just our investment portfolios but also our everyday costs of living,” he says.

“The Government is clearly relying heavily on the projected revenue from this new tax to fund their ambitious ‘return to surplus’ goals and no doubt to recoup some, if not all the revenue forgone from proposed tax reforms.

“With this in mind, you would be right to anticipate the current industry versus government battle continuing for a while to come.”

Alexander and Evans agree the ‘knock-on’ effects of the RSPT will be felt further than the Rudd administration is letting on.

“The Government has been very good in implying it’s only for corporations making huge profits, but really it’s for everybody,” says Evans.

Adds Alexander: “The major concern is that the tax applies for anything taken out of the ground, so it will have an effect on other sectors such as property and development. It needs to be weighed up whether there will be a significant impact on projects going forward.

“There has been similar taxes implemented on the gas and oil sectors recently and not too many gas or oil projects have been canned as a result. But if resources projects are halted from the resource tax, then it could have a direct effect on all the equipment and services outsourcing involved in the industry.

“If one project halts then a hundred jobs may be in immediate jeopardy, but the knock-on effect through all the outsourcing sectors could really put thousands of jobs at risk.”

HLB Mann Judd’s Janelle Manders says it is ‘too early’ to predict the impact the RSPT will have on the economy, but those in project-driven contracting roles will be anxious.

“For any business, tax is a major influence on decision making and mining and resource companies will be making decisions based on the RSPT if implemented,” she says.

“It’s likely to have a major impact on a lot of other industries, but certainly those employed on a project-basis or involved in the outsourcing sectors will be more susceptible to its effects.”

Super problems for small business

The proposal to increase superannuation guarantee payments to 12 per cent by 2019/2020 has been hailed an important initiative for Australia’s ageing population, but it also has direct ramifications for employment.

Evans says that while demographically Australians are not good net savers and superannuation is essential to the country’s future wellbeing, the changes will make the process more difficult for employers.

“The biggest thing we’ve seen affect employers is that their employees can now direct their superannuation wherever they want to,” says Evans.

“So employers who were dealing with one super fund now have to deal with 10 or 20. Many small businesses may look towards outsourcing or contract work so they don’t have to deal with that, like the apprenticeship schemes.”

The Government has given SMEs some reprieve however, by implementing a simple electronic payment process through Medicare Australia, called the Small Business Superannuation Clearing House.

McLauchlan however says the Personal Services Income legislation means it is unlikely businesses will be able to get around the increase in super payments to employees.

“At the end of the day there is legislation around to stop that from happening. If you are getting more than 80 per cent of your income from one particular company, then the tax office classifies you as an employee,” he says.

Bevan suggests that staggering super increases over the next 10 years ‘should ensure that employers are not left to deal with an overnight increase in their employment costs’.

“The reality is that superannuation remains one of the most powerful and tax effective wealth creation platforms we have available and generating a sizeable superannuation asset is far easier the earlier you start, not only from the basic standpoint of compounding returns but also from an investment risk perspective,” he says.

McLauchlan agrees that the 10-year staggering of the increased super payments is important to SMEs as in current economic conditions, an immediate 3 per cent hike for some ‘could mean the difference between profit and loss.’

“The benefits from this policy won’t be seen in 10 years, they’ll be seen in 20 or 30 years,” he says.

“It’s nice to see a government doing something for the long term, even though they know they may not be in power to receive the benefits.”

The tax office will also be able carry out extra audits due to funding increases that according to Manders, it’s no coincidence.

“The rise in the amount of the super guarantee could lead to more ‘cash-in-hand’ payments and the extra funding is likely to be put towards targeting businesses looking to get around super through cash transactions,” she says.

“For small businesses on the Gold Coast, it means a universal employment scheme that takes away the ability of each business owner to remunerate their employees in a way that suits them. Some employees may have had a 22 per cent super rate at the expense of lower wages.”

At Crosbie Warren Sinclair/BAMR, accountants will continue to take the taxation reforms as ‘a grain of salt’ until fully implemented.

Alexander says the rise in superannuation payments may prove beneficial for Australia in the long term; however SME savings in company tax will be lost to super.

“The question is how it will be funded, as for some companies it will just be seen as an extra tax hit,” he says.

“SMEs may be able to fund it from savings generated by the reduction in company tax, but there is only so far that will go.”

The general consensus is that the impacts on ground level SME will be measured in the long term and any benefits within the next two years will be minimal.