Abbott's plan to help small business most likely won't

I AM amazed at the latest idea that has been floated by the Prime Minister. That is to give small business a much-needed boost by cutting their company tax by 1.5 per cent to 28.5 per cent. 

For starters, most small business operators don't work through a company structure: they use a family trust or a partnership. 

The big issues for small business are excessive red tape, penalty rates, rising rents and utility costs, and the worst one of all, payroll tax. Given it's a state tax, and the states are all strapped for cash, there is no way it's going to be repealed - especially not by Tony Abbott.

In any event, let's suppose a small business was particularly successful and made a taxable profit of $400,000 a year.  At the current tax rate of 30 per cent, the tax would be $120,000. At the proposed rate of 28.5 per cent, the tax would be $114,000 - this is a saving of just $6,000 on profits of $400,000. 

Then there is the issue of franking credits.  Our dividend imputation system is the envy of the world, giving shareholders in a company credit for the tax paid by the company.  If a small business works through a company, the net profits can only be taken out by the owners as salary or dividends. 

Reducing the rate of company tax would increase the amount available to be distributed to shareholders by way of dividends, but would also reduce the rate of the franking credit they could claim.

So they would pay more tax on a dividend, which would wipe out any benefit from a company tax cut.  The net result is no change in their after-tax dividend.

Above all, a cut to the company tax rate sends the wrong message.  For 18 months, the federal government has been highlighting the parlous state of the country's finances, and proposing a wide range of cost-cutting measures to get us back in the black. 

These have included co-contributions for doctor's visits, and a reduction in the rate of increase in the age pension.  How can they possibly change course and single out small business for special treatment?

Noel Whittaker is the author of Making Money Made Simple, and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noelwhit@gmail.com.



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