Call to simplify small business structure options

IPA CEO Andrew Conway says the IPA has “long held the aspiration of achieving the simplification of the small business taxation system through the application of a structure which eliminates the need for multiple structures”.

“Multiple structures are commonly needed to achieve tax outcomes which would otherwise be unavailable through a single entity,” Mr Conway said.

“Small businesses seek measures which promote asset protection, the retention of profits for working capital, lower tax rates, access to CGT discounts, succession planning and income distribution. A combination of entities is generally used to achieve these outcomes.

“When a small business operates through separate legal structures, the current taxation system treats the structures as taxation entities separate from their owners, resulting in a quantum leap in tax compliance and complexity.”

Mr Conway said international evidence showed entities specifically designed for small businesses provide a number of advantages such as asset protection, income streaming and retention of after-tax profits.

A simplified small business entity regime which combines the attributes of companies, trusts and partnerships could significantly reduce regulations and red tape for small businesses.

“The creation of this new small business structure would allow small business entities to use a single simplified structure rather than the current complicated ownership structure such as trusts,” Mr Conway said.

“If such a structure allowed the optional retention of income at the corporate tax rate, it would allow most of the benefits that can currently be obtained via the use of a company and discretionary trust via a cheaper and simpler vehicle to administer.

“It is most unfortunate that the taxation of trusts has not been rewritten and updated to reduce complexity, despite numerous recent announcements to this effect.

“The compliance burden from the use of trusts to the small business sector must not be underestimated. A simplified taxation of trusts regime could go a long way in creating a flexible small business structure of choice.”