The nexus between the tax system and insolvency
It’s bemused Mack Advisory, as we’re sure it’s bemused other insolvency practitioners, that for so long there’s been talk of the serious need for tax reform but so little action, while the nexus between the existing system and insolvency has become increasingly obvious.
Australian Tax Office (ATO) figures show that more than 80% of the money it’s owed by SA companies is related to insolvency, and five of SA’s top companies owe $72m of South Australians’ total tax debt of $1.23b.
But of course just as obvious is the nexus between the inevitable hard metres ahead for a reforming government, and with that, the risk of damaging electoral consequences.
However, early indications are that Prime Minister Malcolm Turnbull aims to break the nexus, accept the risk, and back his capacity to present a case for reform to the Australian people that will bring them along with him.
Even as more than 90,000 of the nation’s small businesses are indebted to the ATO, Mr Turnbull has brought into his Cabinet the newly appointed Assistant Treasurer and Small Business Minister Kelly O'Dwyer.
That, together with the appointment of Scott Morrison as Treasurer, is a virtual guarantee that tax reform is about to become a reality. Concurrent with their appointments, the Prime Minister said: “The tax system is one of the key levers the government has to promote economic activity depending on how it’s used or designed.”
Some sad recent history
Mr Turnbull added: “It [the tax system] can either incentivise productivity or work as a disincentive”.
Clearly the existing system has only served to worsen things for SA businesses struggling to survive in a difficult economy made more difficult by plunging commodity prices, Holden’s closure, and the sea of uncertainty surrounding the future of naval shipbuilding.
SA’s total tax bill surged 25% in the past financial year while unpaid tax written off by the ATO rose by 40% to almost $220m – either because debts were unrecoverable or pursuit of debtors is uneconomic.
There’s no point trying to recover unpaid tax in an economy where money making generally ranges between difficult and very, very difficult.
Furthermore a leadership challenge about once ever six months has done nothing for either business or consumer confidence in an economy retarded by a tax system that stunts growth, is losing innovators offshore, and is discouraging investment (see our July news Why Australian Businesses Aren’t Self-investing).
Repeated pleas to Canberra from prominent lobby group Business Council of Australia (BCA) to aid the country’s competitiveness by reducing the company tax rate from the current 30% to 25%, have been ignored – despite this being the average for member nations of the Organisation for Economic Cooperation and Development (OECD).
Businesses want stability
The only certainty for business owners and operators for far too long has been uncertainty, but now they’re getting a whiff of winds of change. They’re sensing they may well be looking at a government of solid direction, with the capacity to sell a clearly enunciated and properly explained message of tax reform.
Revenue from the GST as currently constituted continues to shrink as consumers increase their spending on exempt goods and services. Expect the government’s reasons for widening the GST and increasing it’s rate to be expounded, explained, and – dare we suggest it – understood and eventually accepted, despite inevitable howls of politically motivated outrage.
Australia’s 10% GST is less than Australia’s major competitors for international trade. A modest increase would help lessen the Federal Government’s reliance on personal and corporate taxes which this year will account for two thirds of the nation’s $352b of tax revenue.
Over reliance on these revenue streams is a disincentive for people to work harder, if indeed to work at all, as well as being a disincentive to save and to invest in Australia.
Just tweaking the GST and/or upping the Medicare levy won’t fundamentally fix a tax system that’s penalising Australia in international competition for business and those Australians inclined to work harder and have disposable income to better their life style.
Some 27% of Australia’s workforce is now in the top two personal tax brackets, so that even at the current inflation rate, 43% of workers will be in those top two levels within the next decade if bracket creep isn’t reformed.
It’ll be interesting to see to what extent, if any, tax reform lessens the insolvency rate, but in any case insolvency practitioners take no joy from a bad taxation system that helps bring people to them as clients. For firms like ours, this situation represents a business of diminishing returns. The longer such a regime continues, the fewer businesses there will be that could need our restructuring or insolvency services.
The reality is that good regimes of low taxation that encourage economic growth and therefore more business start-ups, tend also to produce more potential clients for firms like Macks Advisory.
For despite on-going newsletters published by insolvency practitioners about recognising signs of impending financial difficulty, the SME failure rate alters little down the years. One in three SMEs will fail in the first year of operation, two in four by the end of the second year, and three out of four by the fifth year.
No government can legislate against ignorance, impetuosity or stupidity, but what’s so important about a good tax regime, is that not only does it give more SMEs at least a chance to start up, but also gives those that exist a better chance to stay in business.
For more information, contact Macks Advisory on 08 8231 3323 or visit our office at Level 11, 99 Gawler Place, Adelaide SA 5000.
