An overview of Liberal and Labor small business tax promises


RSM Australia has identified the six key election policies affecting small businesses. 

As the nation gears up for the federal election on May 18, key issues for small businesses are likely to centre on questions around taxation.

Tracey Dunn, senior manager, tax services, RSM Australia, said, “Small businesses and individuals face uncertain times with the potential outcome of this election somewhat unclear for these taxpayers. Tax is often a political football, since many Australians feel strongly about the amount of tax they pay and the services their taxes are used for. It’s therefore important to take a close look at what’s being promised by each party.”

RSM Australia has weighed up the Liberal and Labour parties to help small businesses understand the different tax approaches they are taking.

1. Fast-tracking of reduction in corporate tax rate

The Liberal party promised a fast-tracked reduction in the corporate tax rate that will overcome current complexities around accessing the lower tax rate. Many small businesses have been left out of pocket, however, as the government failed to include a mechanism for taxpayers with prior-year retained profits to access the franking credit gap created between profits taxed at 30 per cent and dividends franked at 27.5 per cent. This has resulted in a windfall for the government and a loss for small businesses that is unlikely to be corrected.

Labor has indicated that, if elected, it will reverse the changes to reduce the corporate tax rate for entities other than small business. The introduction and reversal of tax policy is unhelpful and adds a burden to compliance costs.

2. Changes to the taxation of trust distributions

While the Liberals haven’t announced policy changes in this area, Labor proposes to introduce a minimum tax rate of 30 per cent on distributions made by discretionary trusts to adult beneficiaries. This will impact small businesses who operate via trust, especially where beneficiaries work in the business and take profits as trust distributions as opposed to salary and wages. This will effectively remove the tax-free threshold for those without income from other sources, and it also means small business profits will be taxed at a minimum rate equal to that imposed on large taxpayers.

Tracey Dunn said, “There is some confusion over how this policy will interact with base rate entity rules and could result in a situation where a corporate beneficiary is taxed at a lower rate on trust distributions than other beneficiaries. This is a poorly thought-out policy with potential to impact thousands of small business owners, many of whom earn low to middle incomes but use trust structures for asset protection and succession planning. This will result in a significant tax increase for small business owners and add another layer of complexity to tax compliance.”

3. Franking credit policy

Despite introducing legislation with a similar impact for some taxpayers, the Liberal party has indicated that it does not support the proposed removal of refundable franking credits.

Tracey Dunn said, “Any proposed removal of refundable franking credits will have a significant negative impact on low income earners and small business owners who operate their business via a corporate structure. Taxes are paid in advance and any excess is refunded but, under this policy, shareholders won’t be entitled to a refund of excess tax paid on their behalf.”

4. Negative gearing and capital gains tax (CGT) changes

While the Liberal party has not announced policy changes for negative gearing, there is a chance it may seek to reintroduce a policy to remove the CGT main residence exemption for foreign residents if re-elected. Labour has proposed to remove negative gearing on all new investments other than new residential property, and to reduce the CGT discount from 50 per cent to 25 per cent.

Tracey Dunn said, “Those most likely to use negative gearing are middle income earners rather than high income earners. This policy, if enacted, would add unnecessary layers of complexity to annual tax compliance and make preparing tax returns a nightmare.”

5. Instant asset write off

Instant asset write offs are welcome but also add to confusion for taxpayers looking to purchase business assets. Small businesses would be more likely to benefit from this measure if it were made a permanent part of tax legislation, reducing complexity and letting small businesses bring forward the purchase of business assets when the business is ready to grow.

The Labor Party has indicated previously it would make this measure permanent. In addition, the Labor Party will let all businesses claim an upfront deduction of 20 per cent of the purchase price of an eligible business asset where the asset costs more than $20,000, with the balance to be depreciated consistent with the asset’s effective life. This would be a welcome measure for businesses.

6. Proposed tax cut for small businesses hiring young or old workers

Labor has announced that it would give small businesses a 30 per cent tax break on wages of employees younger than 25 or older than 55, or employees who are parents or carers trying to return to the workforce. While initially welcomed, this policy doesn’t appear to be as generous as subsidies already available to small businesses. The details of this policy remain unclear but, if the incentive is designed to replace existing wage subsidies and small business discretionary trusts are excluded from accessing the measure, it may not be as beneficial as first thought.

Tracey Dunn said, “Overall, Labor policies are likely to result in tax increases for small business taxpayers and add significant additional layers of complexity to tax compliance. Liberal policies have, for the most part, been implemented, so the outcome of these is already clear. However, with some failed attempts at new legislation, it would be understandable if small business had doubt over future tax changes that may be planned by a Coalition government but are still to be announced.”