Much tax ado about nothing

OPINION: If ever there was any doubt about Australia's reputation as the lucky country, it appears to have been removed by the recent debate regarding a 1 per cent company tax rate cut for the very narrow sector of small business that is fortunate enough to operate through the medium of a company.

The proposal, for those who missed it, is that one of the carrots to compensate for the stick that is the minerals resource rent tax (the technical name for the mining tax) would be a reduction in the company tax rate from 30 per cent to 29 per cent for incorporated small businesses. The planned start date is July 1.

Small business in this context as currently planned will be defined broadly as any business carried on through a company where the annual turnover is no more than $2 million.

According to some estimates, this will deliver tax cuts for 720,000 incorporated small businesses out of a total of 2.4 million small businesses conducted as sole traders, partnerships, etc.

The cost to government revenue in the first year is expected to be in the order of $200m, which would in part be funded by a $1.4 billion revenue take from the proposed mining tax, based on current estimates.

Let us for a moment look at it from the micro perspective of an incorporated small business, rather than from the macro perspective of the government.

A business with an annual turnover of $2m (which is the current proposed upper threshold to qualify as a small business) might reasonably have taxable income of $1m, assuming deductible costs against turnover of $1m.

Tax currently would therefore amount to $300,000, which after the proposed corporate tax reduction would be reduced to $290,000.

Of course, all this assumes that the incorporated small business in question is profitable. If it is not, it is unlikely to be paying any tax, and accordingly a 1 per cent tax reduction would be meaningless.

Even when looking at profitable incorporated small businesses, most would be lucky to have the numbers suggested in the previous paragraph. The numbers would more probably be half those suggested and thus give rise to net annual savings of only $5000.

Without wishing to belittle the savings that might be achieved, one would have thought that at a micro level they are so marginal as to make almost no difference to the ongoing viability and profitability of most incorporated small businesses.

At a macro level, $200m in costs is a very small hit to a government budget which runs into many, many billions.

In any event, one would think that if the government is to expend some of the yet-to-be-proven revenue from the mining tax, there are far better ways to use those funds for the benefit of small business.

An upfront grant of $5000 to any newly established small business employing at least two unrelated individuals might perhaps be of far more benefit to the individual enterprise -- and to the economy as a whole -- than a minuscule tax cut to existing profitable incorporated small businesses.

Based on those numbers, this could aid in the establishment of 40,000 new small businesses.

How we can spend so much time and energy arguing about so little is quite remarkable.

We are undoubtedly the lucky country if this one per cent tax reduction for such a small group occupies our headlines so extensively.

Robert Deutsch is a Professor in UNSW's School of Taxation and Business Law at the Australian School of Business.

This article first appeared in The Australian.