Proposed small business entity might become structure of choice for SMEs: CPA Australia

A new form of small business entity might be on the cards, with the chairman of the Federal Government’s business tax working group flagging reforms designed to make life easier for unincorporated businesses.

Working group chairman Chris Jordan has told the Australian Financial Review that the new small business structure would be a “low-cost, easily maintained entity that allows you to have limited liability but also allows the ability to have the pass-through attributes as well.”

Pass-through or flow-through entities allow income to flow through a business to the owner or investor – that is, the income is attributed to the owner not the business structure.

Small Business Minister Brendan O’Connor told the AFR he has an “open door” on potential changes.

CPA Australia business and investment policy head Paul Drum welcomed the idea, tipping it could become the “structure of choice” for small business and could kick in with as little as 12 months’ consultation and planning.

“If designed properly, it would be quite attractive for small business,” Drum says, as well as deliver compliance savings by doing away with the need for a corporate trustee.

“In fact, it would probably be the structure of choice. It just seems to be a simpler way of doing the same thing.”

The accounting body has long been a supporter of the S Corp structure seen in the US, which combines the limited liability of a company with the benefits of a flow-through entity like a partnership or trust.

“People keep doing little things to recognise that small business is different without biting off the big thing: which is do we need another entity?” Drum says.

But there is reason for caution: Drum says there has been no appetite for the change from Labor, the Coalition or Treasury, and the Henry tax review did not recommend it.

He also notes that it’s difficult to predict how the proposed structure would impact on Government revenue, or whether it would take over existing structures or work alongside them.

“But in the context of Australia’s competitiveness in the Asian century and our productivity, profound tax reform is still necessary,” he says.

The comments come as small business readies for a one per cent cut in the company tax rate to 29% in July 2012 – a tax cut supported by the Greens, but not the Coalition.

While the tax cut is welcomed, it has been criticised because:

• it is exclusive only to small business, with the Greens not supporting the same cut for larger businesses;
• most small business are not incorporated and therefore will miss out;
• the small business revenue threshold is set at $2 million, meaning companies with larger revenue figures will miss out; and
• the 1% cut is not large enough, given the Henry tax review had called for a 25% company tax rate.

These conditions mean that less than a third of Australia’s 2.5 million small businesses will be eligible for the July 1 tax cut.

Drum says Jordan’s comments are interesting on several levels: firstly, because they are outside the business tax working body’s purview of looking into how a loss carry-back scheme might work and how it could be funded, and secondly, given his role as chair of the Board of Taxation.

Drum speculates that the comments might spring from a view within the business tax working group that a loss carry-back scheme would be limited only to companies, so a better approach would be the establishment of a different kind of company for small business.