Small business tax is the crucial piece of Josh Frydenberg’s reform

Treasurer Josh Frydenberg is pushing reform to improve conditions for entrepreneurs. Picture: Kym Smith

Australia’s fortieth Treasurer, Josh Frydenberg, this week announced the first two steps in his plan to transform Australia into a much more entrepreneurial nation. But it is his planned third step that will be the biggest: the introduction of fairness into the small and medium business taxation collection system.

In 2020 all attention has been on the budgetary measures and problems that have spilt out of the COVID-19 pandemic. It is now clear that Frydenberg has a fundamental plan to change the nation’s structural pillars for business. It is a historic change in direction that will be compared to those of the 30th Treasurer Paul Keating and the 35th Peter Costello.

The end of the archaic “responsible lending rules”, imposed at the top of the boom, while transformative, is not a fundamental change because we are reverting to our traditional practices.

But those rule changes will have an immediate impact and are part of the Frydenberg web of change. The fundamental nation-changing actually starts with the new bankruptcy laws which give failed businesses a second chance. Traditional Australian law and culture has made it very hard for failed small entrepreneurs to make a comeback and the high cost of liquidation meant there was nothing left of the enterprise that had been built. American culture and rules offer entrepreneurs a second chance to learn from their mistakes. We are now following the US.

The new Frydenberg bankruptcy rules can be made to work in the short-term but, as I will show below, they will soon break down. They can’t work longer term unless Australia follows the other integral part of the US business system: a set of taxation collection rules that everybody understands and which make the tax collection system fair to up and coming enterprises.

ATO as creditor

At the moment the vast majority of bankrupt Australian enterprises have as their main creditor the Australian Taxation Office and the current system of tax collection in Australia is simply incompatible with the Frydenberg bankruptcy laws.

The Treasurer understands that taking one segment of the US system – the bankruptcy laws – will not work without embracing the closely linked US taxation collection system. Not only will adopting key elements of the US system transform the Australian society but it will boost revenue collection. Frydenberg will tackle this task after the budget. And I emphasise the “fairer system” has nothing to do with tax rates.

Ken Phillips of Self-Employed Australia last year spent an extended time in the US studying the American system and his report showed just how far we had fallen behind.

In Australia we have a “robo” liability generation system which, as we saw when used with Centrelink, has dubious validity. But as soon as an enterprise receives the ATO assessment it’s a legal debt that ranks above all others. In many cases the enterprise is instantly bankrupt

Worse still the enterprise after receiving the assessment has to “unprove it” which akin to the French system where the person is guilty and must prove innocence.

The US also used the French justice system in tax until President Bill Clinton adopted English justice for the US tax system so the onus is now on the Internal Revenue Service (their ATO) to prove that the tax is owed.

A fairer system

In the US they have an elaborate system of appeals and debt notifications which are logical and fair. And there is an audit review processes to make sure the US appeal process does not evolve into the ATO’s notorious kangaroo courts. I saw one kangaroo court where the tax officer who made a highly debatable assessment then sat on the appeal board. Not surprisingly, that appeal board endorsed his assessment and the company was duly bankrupted. Its not always as bad as that but the unfair appeal process is rampant.

The US had exactly the same problem but now in the US the amount of tax is now not owed when someone dreams up a number but rather is declared a debt when the appeal process is concluded.

And when it comes to penalties, unlike Australia, there are clear rules in America. And the IRS must settle a case and not extend it for years to exhaust the taxpayer, as happens Australia.

Thanks to whistleblower Richard Boyle and the work if the Inspector General of Taxation and the small business ombudsman, we know how the ATO operates in destroying businesses by garnisheeing income. In the US garnisheeing income can be carried out, but there is a clear set of rules, including plenty of advance notice to the taxpayer that the IRS is preparing to take that action.

In JobKeeper Josh Frydenberg made it very clear to the ATO that he wanted the task carried out properly and the ATO responded by putting its best people onto the task. It worked.

. But in introducing tax fairness Josh Frydenberg will have the battle of his life. The first Morrison ministry introduced a small business appeal tribunal without lawyers, but it was opposed at every step by the ATO. Some 30 or 40 government proposals were rejected. The nation of Australia can be very grateful that its fortieth treasurer understand that his bankruptcy laws fail unless we follow the linked US tax fairness system and also understands the magnitude of the task to change the ATO methods. The nation changing benefits and revenue generation increases are huge.