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Comparing Shorten’s taxes on small business people with Morrison’s

Thursday, May 09, 2019

Our tax calculator released last week shows that if you earn more than $38,000 a year you will normally pay more tax under a Shorten Labor government than under a Morrison Coalition government. We can praise Bill Shorten for being totally honest that a government he leads will be a high-taxing government.

Today we compare Labor’s small business tax policies with those of the Coalition and discuss them. Overall, small business people will pay more tax under Labor than the Coalition.

The higher taxes come about as a result of:
  • Reduced tax write-offs under Labor for investments in small business.
  • Higher taxes on small business trusts by Labor.
  • Higher capital gains taxes under Labor.
  • Refundable franking tax credits being scrapped by Labor.
  • Negative gearing being removed by Labor on investment properties.
These Labor tax policies will increase taxes on small business people, but the impact will vary from individual to individual depending on their circumstances.
  • Causing some concern is the possibility that Labor will deny small business people tax deductions on their superannuation contributions. It’s hard to know what Labor is intending because it says that this is ‘under review’.
  • Both the Coalition and Labor support a lower tax rate for small business.
We summarise and discuss these issues below.

Overall, Labor’s extra taxes on small business people must be seen as a significant negative for small business people compared with the Coalition.

Labor’s extra taxes on small business people

Tax write-off on business investments

Shorten’s Labor policy is that all businesses will be able to immediately deduct 20% of any new eligible asset worth more than $20,000 with the balance depreciated in line with normal depreciation schedules from the first year. (It appears that the deduction will only apply to companies and not to partnerships or sole traders. But this is a bit unclear.)

In comparison, for small business people, the Morrison Coalition currently allows 100% immediate write-off for purchases up to $30,000 whether made by a company, partnership or sole trader. In later years you can depreciate the balance of the purchase in line with normal depreciation schedules.

Here are two practical examples:
You buy a new work vehicle for $30,000
  • Under the Coalition you can claim the full $30,000 as a tax deduction in the year you buy the vehicle.
  • Under Labor you can claim $6,000 as a tax deduction in the first year and the remaining $24,000 can be claimed as a deduction a bit at a time over the following years (usually about 5 years).
You buy a new computer for $4,000
  • Under the Coalition you can claim the full $4,000 as a tax deduction in the year you buy the computer.
  • Under Labor you must write off the computer a little bit at a time over several years (usually about 5 years).

High taxes on trusts

There are about 350,000 small businesses operating as trusts. Their average income is $61,000 annually.

Labor is to impose a 30% tax on individuals who receive an income from a trust. The comparable tax rate for small businesses is 25%. As an example, if you receive $61,000 income from a small business as a trust, Labor’s tax will be $18,300. By comparison, if you were a sole trader, the tax would be $11,372

Labor’s policy would appear to effectively knock out legitimate trust structures that protect assets, allow for proper estate and succession planning, facilitate the distribution of income to participants and stakeholders in family businesses, and so on. For example, this will have a significant impact on small business family farmers who are big users of trust structures.

Labor says that its policy is about stopping income splitting. See here for the reference.

Capital gains tax

Labor plans to reduce the tax discount on capital gains from 50% to 25%.

For instance, if you own a rental property and after ten years you sell it and make a capital gain of $200,000, currently you will pay tax on $100,000 (i.e., tax on 50% of the capital gain). Under Labor, you will be taxed on $150,000 (i.e., tax on 75% of the capital gain).

See here for the reference.

Scrapping of refundable tax credits by Labor

This is a potential big hit against small business people who have worked to create a retirement income through a Self Managed Super Fund and be independent of government. See here for reference.

Negative gearing on property to be removed by Labor

This Labor policy defies both the logic and reality of what a business is. Here is an example:

Say you own two shops—one a coffee shop, the other a clothing shop.
  • One makes a profit of $100,000 and the other makes a loss $40,000. This sort of thing frequently happens in small business.
  • You are only taxed on $60,000 ($100,000 minus $40,000) because even though you have two separate shops, you have one business life.
The same in principle applies to owning a shop and a rental property. Both are businesses. Both belong to you.
  • If you have a coffee shop with (say) a profit of $100,000 but own a rental property and it made a loss of $40,000 (rental income minus bank loan repayments and other business costs), currently you will be taxed on $60,000.
  • Shorten’s Labor wants to stop this and tax you on $100,000 even though you are ‘one business’.
Simply because you are engaged in two different types of business activities doesn’t change the fact that you have one business life. Furthermore, a business loss is a business loss, no matter whether the business is in retail or the property rental market.

Labor’s policy is illogical and unfair. It can be reasonably argued that Labor has a view of business that is not based in fact or reality. This is a big ‘negative’ for Labor. It raises legitimate concerns that Labor has no understanding of how small business operates.

See here for the reference.

Contributions to superannuation

It seems that Labor may undo a government initiative to allow more small business owners to claim their personal super contributions as a tax deduction. There are some 800,000 people vulnerable to this tax attack. This is uncertain, but it is understood that before-tax or concessional super contributions are ‘under review’ by Labor from their existing level of $25,000 per annum.

See here and here.

Tax rates for small business

Labor supports the Coalition’s position of taxing small businesses at 25% for businesses with a turnover up to $50m. Above $50m, the tax rate is 30%.

Election comment authorised by Ken Phillips, Melbourne.

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