It’s time to help small business take on the tax office

It’s now time for one or both of our major political parties to tackle the biggest single hidden issue in the election campaign — the way the tax office is treating the small- and medium-sized business community.

Large corporations have the resources to take the tax office to court so tax officials know they must follow the law or end up in court. The issues in this area usually involve the application of the law to complex transactions.

But small enterprises simply do not have the resources to fight court cases, so the tax office is able to set its own rules and those rules can be different to what the law says.

In an attempt to legitimately tax the capital profits on real estate made by foreign investors the Coalition government has also greatly increased the power of the tax office over local small- and medium-sized business.

And, as things now stand, there will be no effective checks on that power (ATO bombshell is a fresh blow to Asian buyers and the property market, May 19).

I would strongly urge both parties to consider setting up a non-lawyer body that has the power to review small- and medium-sized business tax decisions and, where appropriate, make recommendations that they be overturned (or supported).

The Coalition has set up a network of policies (some of which have been embraced by the ALP) which will greatly encourage the development of small enterprises in Australia. The government is trying to rekindle in the nation a spirit if entrepreneurship and this is to be applauded.

But, if you have a tax office often working in the opposite direction, the government is wasting its time, especially given the dramatic rise in the powers of the tax office.

I emphasise that the target of the July 1 requirement that everyone who sells a property worth more than $2 million must gain a tax clearance is, of course, overseas investors and is due to the fact that there is currently no way of checking what is happening in this space.

The Coalition legislation had its origins in an ALP proposal and both parties say there is about $200m that can be raised annually by such legislation. In other words the tax avoidance involved is substantial.

And, to the extent that the tax clearances also enable the taxation commissioner to discover locals who are also blatantly avoiding tax, the legislation is also good for the community.

But the collateral damage will be severe given that there are few checks on the tax office in the small- and medium-sized business area and the tax office has a track record of behaving badly.

There is no better illustration of this than in the contracting area.

The Howard government set up clear rules that establish when a person can be a contractor and when they must be an employee.

In the lead up to the 2013 election, the then shadow minister for small business, Bruce Billson, publicly complained that the tax office was interpreting the contracting law in a way that was simply wrong — and inconsistent with the Howard law.

Moreover, the tax office was also blocking people gaining Australian Business Numbers (ABN’s) thus making it harder to set up a legitimate business.

We all expected that when Billson went into the inner cabinet the Taxation Commissioner would have been required to obey the law.

There was some improvement but no real change.

In a public forum, Billson confessed that the problem was not the Commissioner but the ‘culture’ in the tax office.

He went no further but I would suggest that culture can lead some tax officials to become a law unto themselves when it comes to small- and medium-sized business tax matters. The laws of the land and fairness are relegated to second place.

Now, it is true that there is an Inspector-General of Taxation where small enterprises can go, but it has powers that are very limited, a small staff and government people admit that the taxation people want it removed so they have unfettered control.

The Inspector-General needs to be given wider powers and more staff or a new body should be set up. Indeed, I would go one step further and suggest that we follow the US and have a court system that handles only tax matters. Currently, judges often hear tax cases where they have very limited experience. Outcomes are a lottery.

The good news is that the activities of the tax office in the small- and medium-sized business area have come to the notice of the professional court case funders who are looking at mounting a series of major cases against the commissioner — possibly personally — that will force the tax office to defend what appear to be weak cases.

The court funders will seek big damages payouts because businesses and livelihoods have been destroyed. Taxpayers will be forced to pay for the tax office mistakes.

But the lawyers will be much richer and it will be a slow process. A non-lawyer review body will be far more effective and much cheaper.

We are simply not going to have a society that is more entrepreneurial unless we assure would-be entrepreneurs that they have protection from the tax office ‘culture’.