Loud and clear for small business: The IPA’s Pre-budget Submission 2024–25 is calling for change

Jim Chalmers spoke with the media at last year’s budget lockup in Parliament House. The IPA advocacy team will again be in the budget lockup this year to bring you the details you need to know.

Taxation reform: It’s time to act

Why:

The IPA has been urging an overhaul of Australia’s taxation regime for years.

The current system is burdensome, inefficient and complex. It hinders productivity, competition and Australia’s capacity to respond to new challenges, such as an ageing population. A heavy reliance on personal income tax creates risks, while unnecessary taxes, such as stamp duty and payroll tax, discourage business development and wage growth.

The IPA’s recommendations:

It’s time for holistic reform of the taxation system, prioritising:

• Fairness, so it’s affordable for taxpayers
• Efficiency, so it doesn’t distort economic decisions
• Simplicity, so it’s easy for taxpayers to understand and administrate

On 31 January at the National Press Club, Allegra Spender, Independent MP for Wentworth, echoed our advocacy, calling for “ambitious tax reform” to “encourage innovation, creativity and entrepreneurialism”.

Benefits for small businesses and their accountants:

A more streamlined taxation system would mean fewer taxes, less time invested in navigating bureaucracy and more incentives to invest in innovation.

Payday Super and Superannuation Guarantee penalty regime

Why:

In the 2023-24 budget, the federal government announced Payday Super – a new rule that, from July 2024, employers must pay superannuation when they pay wages.

Implementing new processes and monitoring compliance will consume valuable resources for small businesses and their accountants. And in the current economic environment, the reduction in cash flow during the transition could lead to collapse for many small businesses.

The IPA’s recommendations:

The government should follow the IPA’s timeline, developed in collaboration with Australia’s other peak accounting bodies.

This would allow for the rectification of existing issues and a staggered implementation. Businesses with at least 20 employees would comply from 1 July 2026 and all other businesses a year later.

Further, the penalty regime for late payment of superannuation needs to be less punitive, so that employers are encouraged to find and fix their mistakes. Penalties for employers who deliberately don’t pay should be harsher than for others.

Benefits for small businesses and their accountants:

SMEs would have time to plan how to transition to Payday Super while protecting cash flow.

Those who discover accidental errors in superannuation payments could amend them without fear of disproportionate penalties.

See the full IPA Pre-budget Submission 2024–25, including all 17 recommendations.

Tax Advisory Board – enhancing accountability and governance

Why:

In June 2011, a consultation panel recommended to then-Prime Minister Julia Gillard that a Tax Advisory Board be established. This body would provide independent oversight of the ATO, thereby increasing transparency and the ATO’s adherence to the Taxpayer Charter.

The IPA’s recommendations:

The IPA supports the establishment of a Tax Advisory Board, as this would significantly improve the governance and accountability of the Australian taxation system.

Benefits for small businesses and their accountants:

A more accountable taxation system would better serve SMEs by promoting fair, efficient and straightforward taxation.

Individual Tax Residency Rules

Why:

Australia’s tax residency rules for individuals, introduced more than 80 years ago, are incompatible with globalisation. They’re based on unclear legal principles, involve subjective assessments, cause uncertainty for individuals and lead to litigation.

In May 2021, the government announced it would replace the rules with a modern framework based on objective tests, in keeping with the Board of Taxation’s 2019 recommendations.

The IPA’s recommendations:

The government should modernise the rules; however, some flexibility should be retained to prevent unjust or unreasonable outcomes.

Further, the IPA disagrees with the proposed ‘45-day requirement’, which would make anyone present in Australia for more than 45 days per year a resident for taxation purposes. This should be extended to at least 90 days.

Benefits for small businesses and their accountants:

Simpler, clearer rules based on objective tests would make it easier for SMEs to determine the taxation status of employees – and how this might affect working arrangements.

Fringe Benefits Tax (FBT)

Why:

FBT carries higher compliance costs than any other tax – yet comprises less than 1% of Australia’s total taxation. These costs are particularly burdensome for SMEs.

The Board of Taxation is reviewing why FBT compliance is so complex and how to streamline it.

The IPA’s recommendations:

The IPA supports the review and proposes an overhaul of FBT. This should include:

• More consistent rules
• Clearer methods for evaluating non-cash payments
• Shifting FBT to employees

Benefits for small businesses and their accountants:

These changes would ensure a more neutral treatment of non-cash remuneration while reducing the compliance burden for employers and workers.

Reform small business CGT (SBCGT) concessions

Why:

The SBCGT concessions enable small businesses to defer or reduce capital gains on the sale of active assets. However, the legislation is too complex, and compliance is onerous.

Further, a small number of businesses are accessing most of the benefits while the total amount claimed is growing unsustainably. From 2013-14 to 2015-16, claims of $6 million or more grew fastest (by 55%), while the total increased by 16% annually from 2013-14 to 2015-16.

The Board of Taxation, in a 2019 review, proposed reforming the concessions, to make them simpler, fairer and more sustainable.

The IPA’s recommendations:

The IPA supports the reform. It should include:

• Increasing the turnover threshold from $2 million to $10 million, so more businesses qualify
• Removing the net asset value test
• Collapsing the three exemptions (15-year, active asset and retirement) into a single, capped exemption

Benefits for small businesses and their accountants:

The concessions would be available to a greater number of SMEs with revenue between $2 million and $10 million. Determining and meeting compliance requirements would be easier, lowering the costs associated with accessing the concessions.

Small business tax offset

Why:

The small business tax offset provides a 16% tax benefit, up to a limit of $1,000 per taxpayer in an unincorporated business.

It aims to level the playing field for the 70% of businesses that don’t enjoy the company tax rate.

In 2022, the offset increased to 16% (from 13% in 2021 and 8% in 2020); however, the $1,000 cap remains.

The IPA’s recommendations:

The cap should be increased and should apply per business, rather than to individual taxpayers.

Benefits for small businesses and their accountants:

Increasing the cap would create incentives for SMEs and help them to meet rising costs.

R&D tax incentive to boost productivity

Why:

In October 2020, the government proposed amendments to the R&D tax incentive scheme (R&DTI), recognising the centrality of innovation to growth.

However, these amendments do not support innovation within SMEs sufficiently for several reasons, including:

• There is no entity to promote R&D by SMEs or foster collaboration
• The criteria for R&D is too narrow and does not include software
• Subsidies focus on market failures, rather than innovation
• They do not provide sufficient capital for SMEs to conduct R&D, particularly given SMEs’ lack of cash flow

True ‘new to the world’ innovation is only achieved by 1–2% of Australian businesses, according to the Productivity Commission, and those new ideas and products are central to boosting productivity.

The IPA’s recommendations:

The government should:

• Increase R&D subsidies for SMEs
• Revert tax credits to the flat rate of 43.5% (rather than the planned rate of the corporate tax discount + 18.5%)
• Provide quarterly offsets for R&D
• Promote collaboration via vouchers that fund research projects
• Offer tax relief for R&D expenses
• Expand the criteria for eligibility to include software

Benefits for small businesses and their accountants:

Increased incentives will enable SMEs to put more money, time and energy into R&D, which will lead to greater innovation and, ultimately, greater productivity.

Securing Australia’s future

The next budget provides a unique opportunity for the Federal Government to acknowledge the challenges SMEs have faced in recent years.

Providing them with tax relief and incentives while avoiding onerous and stifling compliance processes is necessary to allow SMEs to continue to grow.

With adequate support and fewer barriers, SMEs can continue to increase productivity and boost innovation, so that Australia’s economy achieves the growth necessary to maintain and improve living standards for decades to come.

Register now for the IPA Federal Budget Breakfast to attend in-person or online. You’ll hear directly from the policy-makers straight after Budget night.