Since the introduction of income tax in 1915 to fund the cost of World War 1, Australia has relied on income taxes to fund the cost of Government and the welfare of our community.
Income tax now accounts for more than 60 per cent of total tax collected. By comparison the average OECD countries rely on consumption taxes of 33 per cent, and social security contributions of 26 per cent to fund their activities.
Australia’s reliance on income tax to finance the activities of Government has created a tax system that is overly complex, imposes significant costs to the taxpayer and for business is a constraint in achieving growth that will create more jobs.
In the past two years Australia has suffered from fires, floods, Covid 19 and global strategic challenges, with consequential loss of property, jobs, businesses, and increased costs to operate.
Our tax system needs to change to create an environment that supports business to grow and employ people to rebuild our economy. With an ageing population this need is becoming imperative.
For small and medium businesses (SMEs), the complexity is seen in different tax rates applying to different structures.
From the application of tax to drawings irrespective of the use of the funds for both private and business use, to the taxing of employee benefits at the top personal tax rate – other than cars – to the use of multiple concessions all with different thresholds for eligibility.
It’s clear that changing the current tax system to a consumption based tax system is a massive jump from the current dependence on income tax.
Could our system be streamlined to encourage business growth and the creation of jobs by reducing the current level of complexity in our tax law? For example, could Australia:
- Introduce a standard 25 per cent tax rate for all small business irrespective of the source of income.
- Change the Division 7A rules to only tax funds drawn from a business – not otherwise taxed – that are used for personal or private use.
- Rewrite the Fringe Benefit Tax law to tax benefits at the recipient’s marginal rate of tax, instead of a flat 47 per cent rate.
- Streamline the eligibility for SME concessions to one simple basis, like the definition used in the Corporations Act to define large companies.
- Allow individuals to file joint tax returns with their spouse.
- Allow a standard deduction for work related expenses for all individuals
The introduction of some or all these ideas would reduce the compliance burden on business, and free up owners time to grow their business to build a stronger community for all Australians.
Today SMEs account for a staggering 98 per cent of all business in Australia, contribute 33 per cent of our GDP, employ 41 per cent of the workforce and only contributing 22 per cent of tax revenue.
Removing the compliance burden from our current reliance on income taxes is good for business, but also good for the country – helping create a better environment for our future.