The Institute of Public Accountants (IPA) supports the government increasing the tax discount for unincorporated small businesses, in line with cuts to the small business company tax rate.
However, the association is stressing to government that the small business tax offset cap needs to be raised to mirror the tax relief available to incorporated entities.
“Reducing the corporate tax rate further for incorporated small businesses means that 2.3 million small businesses would miss out on similar tax relief, as they are not operated through a company; approximately 70 per cent of small businesses are unincorporated,” said IPA chief executive officer Andrew Conway.
From the 2015-16 income year, the government introduced the small business entity tax offset, which provides unincorporated small businesses with a tax discount broadly equivalent to the small business company tax rate cut of 1.5 per cent that was also introduced in the 2015-16 income year. The small business tax offset entitles individuals who earn income from an unincorporated entity to a tax offset of 5 per cent of their net small business income, capped at $1,000.
“The IPA initiated the introduction of such an offset to address the regressive nature of compliance costs on small business entities,” said Mr Conway.
“This would minimise tax distortions between the different entity types through which small businesses may operate and would ensure that the many unincorporated small business entities receive an increase in cash flow from tax relief.
“We believe that further increases in the unincorporated tax discount for small businesses is consistent with the original policy intent for the small business tax offset.
“Increasing the tax discount for unincorporated small businesses will provide increased cash flow to profitable unincorporated businesses as they will have higher after-tax earnings, enabling them to reinvest in their businesses, which would encourage greater levels of employment.
“However, while increases in the discount will increase the amount of offset an eligible individual may claim, the $1,000 offset cap will remain, limiting its intended purpose.
“While we support the change from $2 million to $5 million turnover threshold for the small business tax offset, we believe the $1,000 cap needs to be raised over time to mirror the tax relief available to incorporated entities, in line with the original policy intent,” said Mr Conway.