It's the economy, stupid!

The effect of the coalition’s paid parental leave scheme on small to medium businesses

Big business may not be the only ones to pay for the PPLS.

On Wednesday this week the Shadow Treasurer Joe Hockey and Shadow Finance Minister Andrew Robb issued a strongly worded press statement that refuted the federal government’s claims that the opposition would impose severe cuts should they win office at the forthcoming election.

According to the coalition’s press release Labor’s scare campaign is unfounded. The statement confirmed that there would be no cuts to federal spending on schools or hospitals, defence or medical research. There would also be no change to the GST. As stated in the document: “There is no change to the GST – which the Coalition will not alter, full stop, end of story”.

Paying for the PPLS

A major focus of the press release was the funding structure for the opposition’s Paid Parental Leave Scheme (PPLS). Designed to replace the current scheme introduced by the Labor government, the PPLS will carry a price tag of at least $9.8 billion according to this press statement.

The coalition’s ability to fund this scheme is predicated on the assumption that the scrapping of the existing scheme will save around $3.7 billion, and a series of additional cuts or offsets. Amongst those mentioned in the statement were increases in tax receipts and decreases in benefit payments to higher income families. This was estimated to save around $1.6 billion.

Another cost saving measure was the provision to allow state government sector employees the choice of using the PPLS or their existing state schemes. According to the press statement: “The overwhelming majority are expected to choose the new Coalition scheme”. This would save an estimated $1.2 billion and leave no disadvantage to the state governments.

So the cost of the PPLS will be offset by some $6.5 billion in cuts or offsets leaving a gap of $3.3 billion to find. Yet according to the coalition the levy of 1.5% on companies with taxable incomes above $5 million per year will raise $4.4 billion leaving a small net gain of $1 billion.

So what is the impact on small to medium enterprise?

Assuming that these various assumptions made by the opposition over the PPLS are to be believed, the equity and long term sustainability of the scheme remains in question. In particular what will be its impact on Australia’s small to medium enterprises?

A key factor in making the PPLS work is the levy of 1.5% on larger firms. It should be noted that the coalition has also promised a 1.5% company tax cut so this will presumably leave these firms no better off.

Tony Abbott has argued that the PPLS will be paid for by big business. However, there are likely to be many small to medium sized firms, with annual turnovers just over the $5 million mark who will find the additional 1.5% tax impost an unwanted burden.

According to Australian Bureau of Statistics (ABS) only 6% of Australia’s businesses have annual turnovers in excess of $2 million. This amounts to around 130,416 businesses out of a total population of just over 2.1 million companies. Even fewer have incomes over $5 million but not all are large (e.g. those with more than 200 employees).

The decision to put the 1.5% levy on firms with an annual turnover of $5 million as the cut off level has not been fully explained. However, it seems that a minority of Australia’s companies will now pay for the PPLS and many may not be big businesses.

It is worth noting that only 39% of Australia’s businesses have employees. The 1.3 million sole traders that comprise the other 61% of our businesses will not pay the levy, but they might – in the case of female owner-operators – benefit from the PPLS.

Of the remaining businesses only 4.1% have more than 20 employees and of these only 6,411 have over 200 employees. It is these medium to large employers who will carry the burden of the PPLS cost.

The OECD defines a micro-enterprise as one with annual turnover below $2 million and fewer than 10 employees. Small firms are those with $2 million to $10 million and between 10 and 50 employees. Medium sized firms are those with between $10 million and $50 million in annual turnover and 50 to 250 employees.

Australia’s definition of small to medium enterprises does not use a turnover figure. However, there are many firms with annual turnovers of more than $5 million that would not be considered large. In fact many of Australia’s medium sized firms would be captured by the PPLS levy.

There are around 82,326 medium sized firms in Australia which employ an estimated 754,000 people or some 12% of the population. Most have annual turnover figures over $5 million and it will be on their shoulders that the PPLS levy will fall.

So the majority of small businesses will pay nothing, but will still enjoy the benefits of PPLS for their female employees. At the same time many of their mid-sized counterparts will be hit with the cost of funding the scheme.

Further, as with many such schemes over time it is likely that the 1.5% will be insufficient to pay for the full cost of the PPLS. In that case will we see the 1.5% levy increased or will it be widened to encompass the smaller firms, say with annual turnovers of less than $5 million?

Note: Tim Mazzarol is President of the Small Enterprise Association of Australia and New Zealand (SEAANZ).

SEAANZ is a not-for-profit organisation founded in 1987. It is dedicated to the advancement of research, education, policy and practice in small to medium enterprises.