Tax revamp no bonanza for small business

At the Tax Working Group (TWG) Conference, NZX chief executive Mark Weldon said if Australia made a drastic cut to its corporate tax rate, we’d be under intense pressure to follow. If we didn’t, capital would simply cross the Tasman, taking jobs and tax revenues with it.

But how would it gel with the TWG’s goal of aligning the corporate and personal tax rates? It can’t afford to bring personal rates down more, but it still wants to keep personal and corporate rates aligned, or at least close. One way to make it happen, Weldon suggested, was to have two rates. For example, 25% for all the big companies that would leave if conditions weren’t favourable, and 30% for all the local or small firms. Say, every firm worth less than $5 million.

It was like one of those dreams where you find yourself on stage, and you have no pants.

It would be a pretty horrific scenario for the government to handicap small businesses against big businesses backed by foreign capital. With all the competing pressures facing the government, small business could get crushed in the mix.

The first of these is the desire to align the tax rate to reduce the amount of tax avoidance caused by people arranging their income so it’s covered by the lowest rate.

At the end of the Rogernomics era, the corporate, personal and trust tax rates were aligned. “Conceptually, it’s brilliant,” says tax consultant Terry Baucher who was at the TWG Conference. “It was, at that stage, the only system in the world that did that. The whole idea was based around economic efficiency. People got on and just did the deal because it was a good deal, and they weren’t gaming the [tax] system. Tax practitioners were no longer required to the same extent. That has all changed.”

Rates alignment means less worrying about tax, which is one of the goals that everybody — even tax consultants — can agree on. But the TWG puts the cost of bringing income tax down to 30% at $1.4 billion a year, and bringing trust rates to 30% at $250 million. The last Budget already saw the government committing itself to a constrained Budget for a very, very long time, so the alignment will have to be funded out of new taxes.

And even as it tries to bring down personal and trust rates, there’s an underlying international trend towards lower corporate rates — particularly the Henry Commission’s recommendation to bring Australia’s corporate rate down to 25%. This creates a moving target that we’re in no fiscal position to chase.

This conundrum forces ideas like differentiated rates onto the table, but for the most part, it’s going to mean new taxes. With public antipathy towards property investors, they make an easy political target. The most powerful statistic given by the TWG was that $213 billion was invested in rental properties in New Zealand in 2008. The sector recorded a total loss of $500 million and $150–200 million was subtracted from other taxes to recognise these losses — not exactly a proportionate contribution.

But if the government takes on property investors with capital gains tax, small businesses and entrepreneurs will be caught squarely in the crossfire. At present, you don’t pay taxes on selling a company unless you buy and sell companies for a living. The idea is that when you sell a business, you’re selling its future profits. The government takes a cut out of those future profits, not out of the sale price.

A capital gains tax would dramatically change the incentives for serial entrepreneurs. It would also hurt small business owners who try to sell their business.

Part of the value of the business comes from the goodwill attached to that business, says Baucher. “If [a business] has a good reputation, there will be a goodwill portion to that sale which is not reflected in the value of the assets — it’s an intangible. That is capital gain, which is not taxed at the moment. The biggest impact for every small business owner is that having worked very hard to build goodwill in a business, to sell it on, you’ll certainly lose 20–30% of that goodwill — which is really where your gain is.”

Until the Budget, all we know for certain is that there’s no bonanza waiting for small businesses. Let’s just hope it’s not a bomb.