New tax powers make employing staff riskier for small businesses

The Australian 8:44am March 13, 2019

Robert Gottliebsen

Americans understand better than anyone else in the world that the employment growth in the years ahead will be in small business.

Accordingly, although there was sluggishness in the US overall February labour statistics, the National Federation of Independent Business announced that job creation among small US businesses broke a 45-year record in February, with a net addition of 0.52 workers per firm. The previous record was set in May 1998.

Here in Australia, what do we do?

Our Coalition government has many pro small business policies, but in a mad aberration, it has passed legislation that makes in more dangerous and complex for small businesses to increase employment.

All small businesses need to be aware that as a result of government action, their solvency faces a new hazard.

From 1 July, small businesses that do not deduct sufficient money for employee taxation and then pass those deductions on to the ATO in the due time will discover that the ATO can remove the tax deduction for those labour expenses.

For most small businesses, lack of wage and salary tax deductions for an extended period will send them to the wall.

I emphasise that, in principle, the legislation is not unreasonable, because all businesses are required to deduct the correct amount of tax and pass that on to the government. The legislation has provisions such that if mistakes are made, businesses are not bankrupted. There are also provisions for funding for people in trouble. But the legislation has glaring holes which greatly increase the danger of employing staff.

We all now know that the Australian Taxation Office systems are not working correctly. And if an aggressive tax auditor says that a business should have deducted a certain amount and that figure is wrong, there is no help in the legislation to prevent the business from being wiped out.

If a small business uses a labour hire firm to provide services and that labour hire firm uses an independent contractor, the small business is in great danger.

Similarly, when hiring a contractor who provides an ABN, a small business can be caught out if someone in the tax office thinks that the relationship was one that should have been classified as employee, rather than contractor. The explanatory notes mention six different tests but there are more that are not mentioned. Many tests are subjective and yet the punishment making the wrong guess is severe.

It has been well established that abusing small business is part of the ATO culture, so to give the organisation more weapons to potentially increase the abuse is simply wrong. One pretext for the extra powers was that it might reduce the cash economy. If anything, the legislation will tempt some small businesses into greater use of the cash economy because there are no records. In any event, the cash economy has been substantially reduced by electronic payments.

As things now stand, there is no small business tax appeal process that works, so the employment generation sector of the economy is very vulnerable to these draconian new ATO powers.

The Coalition is proposing a small business tax tribunal for appeals. Once an appeal is underway, it stops any ATO action taking place to bankrupt the business. Not surprisingly, the ATO, with its deep the culture of the small business abuse, is so far not co-operating in this area. The ALP proposal is to have a second taxation commissioner responsible for appeals. That proposal will work for a time. If the ALP wins the election and the Liberals haven’t got their small business tribunal in place, the ALP plan will need to be rushed in, given this flawed small business legislation passed by the Coalition.

The great problem is that the politicians on both sides do not understand how the small business sector works. Taxation needs to be simple and not highly subjective. Purely anecdotally, I have encountered three small businesses in the last few months that have had financial arrangements with the ATO that gave them a few months to make their payments. These arrangements have been cancelled as the blood lust to use these new powers spreads though the ATO.

To comply with the legislation, small businesses will have to synchronise their payroll systems with the ATO, which will then be able to monitor how many employees the businesses have and therefore know roughly the amount of tax involved. This will bring to small business a monthly software cost.

Moreover, consistent with the ATO’s systems problems, there are at least some parts of the ATO from which small businesses can’t discover what will be required for 2019-20.

Maybe our politicians should be sent to the US to discover how the new world generates employment.