Tax cuts turn to tax hike

The Sunday Times, 11.9.16:

SHAREHOLDERS in small businesses with a turnover between $2 million and $10 million could face a higher tax bill during the transition to Treasurer Scott Morrison’s corporate tax cut.

The Government has conceded after consultation with Treasury officials that in some cases shareholders could pay more during the transition from a 30 per cent rate to 275 per cent.

The bizarre unintended consequence of the tax cut is a one-off that will affect only companies paying a franked dividend in the year after they pay the 30 per cent tax.

In some cases, a small-business owner receiving a $100,000 dividend could be worse off by up to $20,000 in that year.

Pitcher and Partners tax expert Alexis Kokkinos said: “There is a problem that creates a higher tax burden for SMEs moving to the new company tax rates,” Mr Kokkinos said.

“Mile the Government is giving out a tax cut at the company level, if a company pays a franked dividend in the year after it paid the 30 per cent tax, the shareholder will only be entitled to an imputation credit at 27.5 per cent.

“For a small-business owner, that receives a $100,000 dividend a year, the effective tax rate increases from 41 per cent to 43 per cent, after taking into account the tax rate cut This means that, over a seven-year period, , the small-business owner is worse off by $20,345, even after taking into account the tax rate cut.

“This represents an increase in the effective top marginal tax rate from 49 per cent to 50.76 per cent for small business owners.”

Treasurer Scott Morrison’s spokesman conceded some small business operators could pay more tax during the transitional year.

“The Government’s enterprise tax plan provides an incentive to support SMEs that are reinvesting in their business to drive growth and create jobs, which is the experience of businesses at this level,” he said.

“The tax plan extends small business tax relief, including the reduced rate, the instant asset write-off and other provisions, for small businesses with a turnover of under $2 million to small businesses with a turnover of up to $10 million.

“Providing this tax relief to small businesses will provide cashflow benefits that encourage new investment, hiring of new employees and higher wages for employees.”