Introduction - The importance of small business
Definitions
1.1 The Australian
Bureau of Statistics defines a small business in the non-agricultural sector as
one which employs less than 20 employees in the
non-manufacturing industries, and less than 100 employees in the manufacturing
industries. In the agricultural sector, a small business is defined as one
having an Estimated Value of Agricultural Operations of between $20,000 and
$399,000. Smaller operations are considered to make a negligible contribution
to commodity aggregates.
1.2 Using this
definition, small businesses account for about 860,000, (96%) of all businesses
in
Australia, and employ about 3 million out of 5.5 million people employed in the
private sector. Of these enterprises, 635,000 (74%) employ fewer than five
people.
1.3 The Australian Tax
Office defines a small business as an entity (including self-employed
individuals) that returns business income of less than
$10 million. The latest data on returns lodged revels that there were a total
of 1,662,188 such entities in the 1992-93 year of income, of which 1,230,830
(74%) were individuals or partnerships.
The Importance of Small Business
1.4 Whichever definition is used, it is clear
that small businesses form a significant part of the Australian economy,
providing employment for millions of Australian. Indeed, the significance of
small business in Australia is underscored in a recent report by the
Industry Task Force on Leadership and Management Skills which reveals that Australia is notable for the small number of world scale
enterprises which it supports. Only 600 enterprises in Australia employ more than 1,000 people, which 'is a tiny
number by the standards of the major trading nation.
1.5 According to research prepared for the
Industry Task Force, small firms in Australia have been the source of almost
all private sector employment growth since 1 991. The Task Force predicted
that most new jobs created in Australia up to the year 2000 will be generated by
small to medium enterprises (SMEs).
1.6 With unemployment still a major
problem facing the Australian community, support for the important SME Sector
takes on added meaning, especially because the potential for SMEs to become
increasingly important contributors to Australia's expanding export base.
The Beddall Committee Report
1.7 In January 1990, the House of
Representatives Standing Committee on Industry, Science and Technology tabled
its report, Small Business in Australia: Challenges, Problems and Opportunities (the Beddall Report). That Committee expressed
the belief that although there were concerns raised about almost every aspect
of Commonwealth taxation, the most pervasive and most important complaints had
been about the rapid growth in the size and complexity of taxation law, the
complex and uncoordinated administrative systems which support it, and the
associated compliance and reporting costs which are particularly onerous for
small business.'
1.8 The recommendations made by the Beddall
Committee reflected some fundamental small business perceptions as presented to
it, one of which was that tax law and administration do not consider the
operating environment of small (vis a vis large) business and, in particular,
the working capital restrictions experienced by small business. The Beddall
Committee noted that increases in taxation reporting and awareness costs had a
disproportionate impact on smaller businesses because of:
- economies of scale,
which apply to larger businesses in establishing a specific purpose
accounting/reporting function to comply with taxation requirements, do not
apply to small businesses; and
- the inability of many
owner operated businesses to bring the costs of taxation compliance to account
as a tax deduction against income. For example, the cost to a larger business
of employing an accountant is offset by the fact that that cost is a fully
allowable deduction against taxable income. A smaller business may not be able
to afford an accountant without sacrificing other management/advisory services
for which the business depends upon for its viability and will need to absorb
the costs of compliance by requiring the owner/manager or his/her spouse to
perform these tasks.
1.8 The Senate Economics Committee
found during the course of its inquiry into the tax treatment of small business
that although the implementation of some of the recommendations of the Beddall
Committee report had been of considerable benefit to the small business
community, some of the taxation problems encountered by small business remained
essentially unchanged. This report attempts to address these concerns.
This Report
1.9 The Committee believes that the
relative advantage enjoyed by larger businesses in using economies of scale and
associated tax deductions to cope with compliance costs and tax imposts should
be balanced to some extent by certain concessions to small business.
1.10 Therefore, the fundamental
approach used in this report, and expressed through its recommendations, is to attempt to counter the
disadvantage of the size of a small business operation. Unless otherwise
stated, the definition of small business employed by the ABS will be used.
1.11 The Committee considers that small
businesses should not be considered to be on the same footing as larger
businesses in relation to much of the current tax legislation, and that
affirmative action needs to be taken to redress some of these deficiencies.
Some of measures recommended in this report will be revenue neutral. Others,
however, will not be revenue neutral in the short term, as they are targeted to
assist small businesses to enhance their operations and increase business
outputs, profits and employment. In the long-term, these measures should
increase taxation revenue.
Legislation
The terms of reference for this inquiry are
primarily concerned with various provisions contained in the Income Tax
Assessment Act 1936 (the ITAA), the Fringe Benefits Tax
Assessment Act 1986 (the FBT) and the Sales Tax Assessment
Act 1993. Tax changes introduced by and since the 1993
Budget until the end of 1994 include:
- Taxation (Deficit Reduction) Act
(No 1) 1993
- Taxation (Deficit Reduction) Act
(No 2) 1993
- Taxation (Deficit Reduction) Act
(No 3) 1993
- Taxation Laws Amendment Act (No 3) 1993
- Income Tax (Franking Deficit)
Amendment Act 1993
- Taxation Laws Amendment Act 1994
- Taxation Laws Amendment Act (No 2)
1994
- Taxation Laws Amendment Act (No 3)
1994
- Taxation Laws Amendment Act (No 4)
1994
- Income Tax (Deficit Deferral) Act
1994
- Training Guarantee
(Administration) Amendment Bill 1993
- Sales Tax Assessment Amendment
(Deficit Reduction) Act 1993
- Sales Tax (Customs) (Deficit
Reduction) Act 1993
- Sales Tax (Customs) (Wine -
Deficit Reduction) Act 1993
- Sales Tax (Excise) (Deficit Reduction) Act 1993 Sales Tax (Excise) (Wine - Deficit
Reduction) Act 1993
- Sales Tax
(General) (Deficit Reduction) Act 1993
- Sales Tax (General) (Wine - Deficit
Reduction) Act 1993 Sales
Tax (In Situ Pools) (Deficit Reduction) Act 1993.
- Sales Tax (In Situ Pools) (Deficit
Reduction) Act 1993
The Tax Treatment of Small Business
1.12 There are a number of taxes
affecting small (and large) businesses, including provisional tax, wholesale
sales tax (WST), pay-as-you-earn (PAYE) tax, fringe benefits tax (FBT),
prescribed payments system (PPS), capital gains tax (CGT), company tax and
superannuation guarantee (SG).
1.13 All small businesses in Australia must comply with at least one and frequently several
of these taxes. As the following chapters illustrate, none of these taxes in
themselves are simple, and when three or four different taxes apply to the one
business, compliance may become a considerable burden on the operation of that
business.
1.14 Part 1 of this report discusses each
Commonwealth tax that may affect a small business and Part 2 assesses the
cumulative impact of multiple taxes on small business, which results in a
considerable burden of compliance.
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