If a week is a long time in politics, four days of last week must have felt like eternity for the Labor party and Bill Shorten. Having gone from promising to repeal the tax cuts for small businesses with an annual turnover of between $10 million and $50 million on Tuesday, Shorten flip flopped like a fish out of water and reversed his position on Friday.
The original comment by Shorten, and the interview he gave when announcing his backflip, was further evidence of the major difference between the Coalition and the Labor party. On the one hand the Coalition believes in reducing the tax burden on small businesses, while the Labor party is clearly appealing to its power base of unions, workers and industry super funds.
For evidence of this, and how much Labor has lost touch with reality, you need look no further than what Shorten said when fronting the media on Friday. He said: “The message really is to businesses in Australia, the 99 per cent of businesses in Australia, that Labor will make sure that you pay the same or lower tax under a Labor government.”
This statement clearly shows that Shorten and Labor have no idea of what the impact of two of their major taxation policies will be on the small business sector.
The first of these policies is to remove the ability for individuals and SMSFs to receive a tax refund from company franking credits. The adverse tax impact of this on SMSF members and small business owners operating through a company is massive and with regard to companies has not generally been widely understood.
Professor Deborah Ralston, spokesperson for the Alliance for a Fairer Retirement System a coalition of investor, retirement and SMSF organisations, such as the SMSF Association, said “many small business owners may be unaware of the impact of Labor’s proposal on their retirement plans. Those who have invested equity in the company and rely on dividends to fund their retirement may be surprised to find a significant fall in income”.
This policy will have a major impact on small business owners that sell their business owned through a company structure as they get no benefit from the 50 per cent general Capital Gains Tax exemption and the 50 per cent small-business active asset CGT exemption.
This can result in a greater percentage of the profit made on the sale of a business being taxed at the company rate, with the shareholder owners being forced to take these accumulated profits as fully franked dividends. With the small business company tax rate reduced to 27.5 per cent, the imputation franking credit attached to dividends has also been reduced to 27.5 per cent.
A husband and wife shareholder that draw out these accumulated profits to help fund their retirement by taking a $15,000 fully franked dividend each receive a $5690 imputation tax credit, which results in taxable income of $20,690 each and a tax refund of $5690 each.
Under this policy the couple would receive no refund and, although not technically an increase in taxation, will be worse off by a combined value of $11,380. This same adverse tax effect applies to SMSF members, while conveniently members of industry funds will not suffer under this policy.
The second policy will impose a minimum 30 per cent tax on distributions to adults from a discretionary family trust. Currently a couple running a small business that receive a profit distribution of $37,000 each pay income tax of $3572. Under this Labor party policy the couple would pay tax of $11,100 each on the $37,000 profit distribution, a combined increase in taxation of $15,056.
Although there may be some of the Coalition’s policies that will also adversely affect small businesses, when it comes to taxation small business owners will be worse off and pay more tax under a Labor government.
Max Newnham is a partner in TaxBiz Australia and founder of SMSF Survival Centre.