Normal, sensible people will find the following stupendously stupid: if a would-be small-business owner went to an accountant for advice before setting up a business, and commissioned an expert to draw up a business plan, it could prove a struggle to claim these costs as tax deductions.
But recent work suggests we have exaggerated the failure rate of small business. According to Business Victoria, business bankruptcies represented 18 per cent of total bankruptcies in the financial year 2002-03. But the department responsible for small business in that state reported that "economic conditions affecting industry" was the most common cause of business bankruptcies, at 30 per cent, while 12 per cent failed due to "lack of ability".
Accessing advice is a proven way to improve a business owner's ability to build a successful business.
Ali Noroozi, the tax counsel for the Institute of Chartered Accountants in Australia, recognises there is a problem for individuals considering going into business. "We have lobbied for individuals," he says. "However, we understand the Government's position, that it could open the floodgates."
Last year's budget recognised what is glibly called blackhole expenditures. In recently enacted legislation, a business will be able to obtain tax relief for a range of blackhole expenses (including certain pre-business costs) currently not recognised in the tax law. "The changes will facilitate investment by ensuring business can claim tax relief for a wider range of legitimate expenses," budget papers tell us.
While this sounds like progress, it is only a concession for existing businesses already established as companies. If you are a schoolteacher intending to toss it all in to start a restaurant, or a coaching school, your task in claiming deductions is a lot harder.
Noroozi graphically explains Treasurer Peter Costello's fears of making the blackhole changes more equitable.
"Every Tom, Dick or Harry could take the family on a trip to Hayman Island to test out a business idea," he says, "and he could make it all tax deductible."
This is a typical government dilemma, where what should be an opportunity to create good policy is replaced by a quagmire of regulations that make it hard for small operators to access help.
Under some circumstances, smart operators who were starting a business and wanted to do it right by securing good advice, could form a company and then seek the advice. As a consequence of this decision, advice should be tax-deductible.
Sydney-based accountant Neil Wickenden from HLB Mann Judd admits it is all rather complicated, as he reaches for his copy of the Tax Act. "If you incur expenses, it would be best to do so after setting up your company. Then the company, rather than the individual, will have the expenses," he says. "These would be claimable over five years in equal instalments."
However, if you make the double-mistake of being an individual and plan to run your business as a sole trader, or partnership, then getting your pre-business expenses refunded will be a challenge.
Wickenden says you will face the kinds of tests designed to catch out the so called Pitt Street farmer, who uses the tax system to roll a weekend country property.
Federal Labor's shadow minister for small business Joel Fitzgibbon says the blackhole provisions should have sorted out these problems. But if the rules are harder on individuals who want to set up as sole traders, or partnerships, than they are on companies, the matter should be looked at.
There has been progress on pre-business expenses, but getting accountants to decode these regulations costs money, and it is my experience that many accountants aren't up with the blackhole changes.
The difference in the treatment of individuals and companies is inequitable, but it does have one educational benefit - it shows the importance of advice.
For most businesses, the tax bill comes in at around 30 per cent of profit. Given the size, it is plain stupidity that so many of the 1.2 million small businesses out there aren't being encouraged to pay for the best possible tax advice.
What is needed is a simplification of tax rules to encourage small business to seek information that makes a difference to the bottom line.
Recently, the Australian Government's www.business.gov.au won the United Nations Public Service Award for e-government. It was the only Australian winner from these internationally recognised awards.
I am always bagging dumb government actions, but the Department of Industry, Tourism and Resources deserves a pat on the back for its website. Of course, the Government should find some more money to tell small business about it, but that said, it is a good site.
The next step is to make all regulations easy to understand and equitable. Until then, anyone in small business should think about living their lives as a company, and never as a human being.
Autor/Author: Peter Switzer
Quelle/Source: The Australian, 30.05.2006
