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Small business is the collateral damage of Labor's franking policy
When it comes to the hip pocket in this federal budget, Labor has announced a long list of policies that may have a negative impact.
Those in the firing line include investors, superannuation members, self-managed super funds and self-funded retirees, but amongst those impacted, it seems small business has managed to avoid scrutiny.
With eight more days of the Federal election campaign, Labor will promise a bigger surplus than the Coalition.
Or are they the collateral damage that has been overlooked?
When it comes to Labor's proposal to abolish refundable franking credits, small businesses, operating through a company structure, join the list of those who may be negatively impacted.
So, let's start at the beginning. What are franking credits, and should they be refundable?
Here's a simple way to explain them.
So, does it make sense to give the more profitable business owner the franking credit benefit, but deny the same benefit to the struggling business owner?
There are more than 2 million small businesses in Australia but starting one and keeping it afloat is a challenge, with more than half failing within the first three years.
With small business susceptible to such challenges, changes to the franking credits for those operating through a company just doesn't seem rational.
While Labor promotes that this proposed policy change is supposed to be hitting the top end of town, it appears in these scenarios, it's the opposite.
- By Olivia Maragna
- May 10, 2019 - 11.48am
- https://www.brisbanetimes.com.au/na...-labor-s-franking-policy-20190510-p51lxa.html
When it comes to the hip pocket in this federal budget, Labor has announced a long list of policies that may have a negative impact.
Those in the firing line include investors, superannuation members, self-managed super funds and self-funded retirees, but amongst those impacted, it seems small business has managed to avoid scrutiny.
With eight more days of the Federal election campaign, Labor will promise a bigger surplus than the Coalition.
Or are they the collateral damage that has been overlooked?
When it comes to Labor's proposal to abolish refundable franking credits, small businesses, operating through a company structure, join the list of those who may be negatively impacted.
So, let's start at the beginning. What are franking credits, and should they be refundable?
Here's a simple way to explain them.
A business owner runs her business as a sole trader. She earns $20,000 in profit and pays tax on this. As the tax-free threshold is close to $20,000, she pays no tax on the income and banks $20,000 in her bank account. She decides to instead run her business through a company for a number of reasons. She earns the same $20,000 in profit and the company pays about 30 per cent tax on the profit, being $6000. She is left with $14,000 in cash and pays this as a dividend to herself. In her tax return, she needs to gross up her income back to the original profit of $20,000 ($14,000 in dividends plus a credit of $6,000). As the tax-free threshold is close to $20,000, again, she pays no tax on the income and banks $14,000 in cash dividends plus a refundable credit of $6000. She banks a total of $20,000. Under both scenarios, the amount banked is the same. Based on this approach, company tax should be regarded as a withholding tax, similar to how employers withhold tax on employees' wages. However, under Labor's policy to abolished refundable credits, the business owner operating through the company structure will only receive the cash dividend of $14,000 and lose the refundable credit of $6000. Effectively she will pay 30 per cent tax, even though she earns under the tax-free threshold. Now while we can appreciate that business owners won't always make a profit of $20,000, even at a $60,000 profit, the business owner operating through a company would end up with less cash, should Labor abolish refundable franking credits. Increase the profit to $200,000 and under Labor's proposed change, both the sole trader and the company-operated business owner are now in the same position when it comes to their overall tax and cash banked. |
So, does it make sense to give the more profitable business owner the franking credit benefit, but deny the same benefit to the struggling business owner?
There are more than 2 million small businesses in Australia but starting one and keeping it afloat is a challenge, with more than half failing within the first three years.
With small business susceptible to such challenges, changes to the franking credits for those operating through a company just doesn't seem rational.
While Labor promotes that this proposed policy change is supposed to be hitting the top end of town, it appears in these scenarios, it's the opposite.
