IPA chief executive officer Andrew Conway said the discussion paper takes the view that protecting the progressivity of the tax system should not impede the ability of businesses to reinvest their income as working capital.
“This is particularly important for small businesses operating through trusts that have corporate beneficiaries,” he said.
“Facilitating reinvestment supports productivity and entrepreneurial growth and we welcome the removal of impediments to the reinvestment of business income as working capital," added Mr Conway.
The IPA chief executive said the current Unpaid Present Entitlements (UPEs) treatment has significantly increased compliance costs for small businesses using trust structures and called for reforms that address this.
“The broader terms of reference for this review and the removal of the revenue-neutral outcome has given the Board of Tax the opportunity to propose a new model without this unrealistic constraint,” he said.
Mr Conway said he is encouraged by the fact that the Board has now acknowledged that Division 7A can be a significant source of compliance costs for all small businesses, including those that comply with its provisions.
“In broad terms, there are a lot of positives that can be drawn from the second discussion paper. Moving away from the prescriptive, and at times inflexible, non-commercial based rules is a welcome step forward,” Mr Conway concluded.
The IPA has said it is broadly supportive of the proposed measures and has called on government to move quickly on these reforms.