Enterprise society

Red tape, interest rates and taxing times for small business policy

The Gillard government has sought to make small business policy a key feature of its remaining term in office. As a minority government and with the polls indicating that re-election in 2013 may be a challenge, Federal Labor is keen to find areas of policy that will win popular support.

Small businesses generally evoke the same sort of affection from politicians as motherhood. Few politicians will say anything negative about motherhood, and most will agree that more should be done to help mothers. However, finding effective policies that make a significant difference can be elusive.

Progress at the COAG meeting in fighting red tape

The Council of Australian Governments (COAG) meeting held on April 12 was an opportunity for the Federal Government to raise the level of national reform over things that are important to small businesses. These include the coordination of federal and state government agencies to help reduce compliance costs referred to as “red tape”, and measures to enhance skills training.

It was pleasing to see that the Council of Small Business of Australia (COSBOA) was invited to attend the COAG meeting along with the representatives from the Business Council of Australia (BCA). Under the banner “meeting the red tape challenge”, it was agreed that COSBOA would work with the Federal Minister for Small Business Brendan O’Connor, plus relevant State and Territory ministers to review the problem.

Initially, there will be an examination of regulations considered unnecessary or burdensome. These will be reported back to the Prime Minister, Premiers and Chief Ministers along with input from industry to identify areas needing attention. It was also agreed that COAG would examine suggestions made by business under this “Red Tape Challenge”, on a twice yearly basis.

Without doubt this is a positive step. However, as COSBOA noted in their response to the COAG meeting, there remains much work to do. The wider agenda under this “Seamless Economy” reform program is to ensure that Australia’s business community, particularly small to medium enterprises (SMEs), can operate efficiently.

Friday the 13th banking horror

However, the reality of the challenge facing Federal Labor in their pursuit of enhancing the small business sector came swiftly on Friday when the ANZ Bank announced a hike in interest rates. Despite the Reserve Bank of Australia’s decision to leave the cash rate steady at 4.25%, the ANZ Bank pushed up its cost of borrowing by 0.06% per annum.

Although this rate increase by one of Australia’s leading banks may not add more than $1.50 per week on a business loan of $130,000, it is symbolic from a political perspective. SMEs comprise 99% of all businesses in Australia and they employ around 65% of the workforce. Many sectors such as tourism, retailing, manufacturing and international education have been doing it tough lately. The high dollar and competition from overseas providers have impacted on business.

Small business tax relief may be fraught with problems

As part of its May budget planning the Federal Government is seeking to provide tax relief to the small business community. There is a proposal to allow small businesses the ability to offset tax paid on previous company profits against future losses. This scheme is known as “loss carry-back”. Deductions of up to $1 million from the previous two years have been proposed by the Business Tax Working Group.

However, there are many issues about this proposal that have concerned taxation advisors to small business. Among these are the start date of 2013-2014. This may be too late for many businesses that have suffered since the impact of the Global Financial Crisis of 2008-2009. While the GFC impacted Australia much less than Europe or the United States, its impact was still felt here.

In the face of the GFC many of the major mining and resources firms placed their operations on hold or cancelled projects. There was also a severe downturn in the previously robust property and construction sector across Australia. I know personally of several small firms that were forced into insolvency or severe restructuring as a result of these decisions by the bigger firms.

A second concern over the Federal Government’s tax reform relates to the provision known as the “same-business test”. This requires the business owner to demonstrate that the losses they are seeking to offset are from the same business operations that produced the profits upon which the original tax was paid.

While this test is aimed at avoiding tax rorting by the unscrupulous, it ignores the often highly dynamic and flexible nature of small firm business models. Many SMEs are entrepreneurial and may seek to engage in new business opportunities by leveraging existing business operations. This can create added levels of complexity to the already complex taxation system.

From Red Tape to Green Bans

Finally, as if things were not already complicated enough for Federal Labor, there was also the announcement on Friday of the resignation of National Greens leader Senator Bob Brown. He was replaced by Senator Christine Milne who quickly announced her unwillingness to accept tax cuts for big business.

As part of the introduction of the Minerals Resource Rent Tax (MRRT), there was to be a 1% across the board cut to the corporate tax rate. Big firms were to get the tax cut from 2013, but small firms with less than $2 million annual turnover, would receive it from 1 July, 2012.

Let us hope that this tax relief for small business is not scuppered by political brawling. Yet how the Federal Government deals with these complex issues will be a critical test of its credibility as the friend of small business.