Announced but unlegislated tax measures – it’s not all about the carbon tax and multinationals

Depending on which list you read, there are somewhere between 80 and 120 tax measures that have been announced by the Federal Government but have not yet been enacted.

The Treasurer, Joe Hockey, has announced how the Federal Government will deal with 18 of these changes.  The fate of the balance is to be determined by 1 December.  A lot of attention has been given to the “big ticket items” – repeal of the carbon tax and the MRRT for example – but the impact on small to medium businesses is often missed.

A large number of these announced but unlegislated tax measures impact on small to medium business and privately held business.  These issues may not make the headlines, but they impact significantly on the functioning of a key sector of the economy.

Announced but unlegislated tax measures create confusion and complexity for private businesses.  They inject considerable uncertainty into longer term investment and decision making and are an impediment to what is one of the drivers of the Australian economy.

Here are some of the key issues:

Loss recoupment

A known technical issue with the current law means that almost any private company with more than one class of shares (which is common, in particular in older companies) will be unlikely to be able to carry forward and utilise tax losses.  The announcement to fix this issue was made back in 2008 but has not progressed.

This technical issue needs to be resolved.

Earn outs

A common way that the consideration for the sale of a business is calculated is based on the future profits of the business.  This mechanism is termed an “earn-out”.  The existing tax treatment of earn-outs can produce inappropriate tax outcomes – for example someone can be taxed on sale proceeds that they never actually receive.  Changes were announced in 2007 and elements of this change are expected to apply from then.  Despite some consultation on the issue, we seem to be no closer to a resolution.

We are at a time where more and more baby boomers are exiting the businesses that they established and yet the tax treatment of the sale is up in the air.

Employee share schemes

Private company start-ups face numerous challenges.  One such challenge is attracting and incentivising the key people needed to drive the business forward.  Historically a share or option plan – so called sweat equity – was an effective way to do this.  The key people took a shareholding in the business instead of salary, with the size (and value) of the shareholding varying depending on the performance of the business.  The changes made by the previous Government to the employee share scheme tax rules made such arrangement uncommercial or at least unduly complex to implement.  A revised regime to deal with such situations was finally announced earlier this year but has not progressed.

Australia should be encouraging entrepreneurship, not hampering it, and the employee share scheme laws should be modified to support the use of these arrangements by start-up businesses.

New CFC laws

Increasingly Australian private businesses are expanding internationally and often this necessitates establishing an entity in the overseas country that they are servicing.  The controlled foreign corporation (“CFC”) laws determine how and when Australia will tax the profits earned by any overseas company that is controlled by Australians.  It was recognised a number of years ago that the current CFC laws were not in keeping with the way businesses need to function in a modern, globally connected economy and the laws were completely re-drafted.  Implementing the re-drafted laws has been deferred a number of times, the latest until at least September 2015 when the OCED considers similar issues.  In the meantime, Australian private businesses will continue to be hamstrung by an out of date set of tax laws that stymy their international competiveness.

This is one of a number of announced but unlegislated tax measures that affects Australian private businesses who operate internationally.  The environment that these businesses are operating in is already challenging enough – they don’t need the Government creating more uncertainty through poorly implemented tax policy.

Rewrite of the trust laws

Trusts are a common and legitimate structure that is used by many owners of private businesses.  They facilitate family involvement and ownership of the business and can protect the business from some of the asset protection risks that the owners may face.

Court decisions, ATO policy changes and announcements by Government over recent years have highlighted the out of date and patchwork nature of the current tax laws applying to trusts.  A complete revision of the laws has been promised, but little progress has been made.  Instead business owners need to continue to operate with tax laws that have been shown to be deficient.  This does not promote the certainty that business needs nor does it support compliance with the tax laws – something that most business owners aim for.

Clarity around the taxation of trust – in particular family trusts – must be a priority.

Other measures

There are numerous other announced by unlegislated tax measures that affect small to medium businesses as well as measures that affect other taxpayers.  The fact that this situation has even arisen would be a strong indicator that the way that tax laws are implemented in Australia is not working.  This process needs reassessment as much as the underlying changes themselves.

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