Whether Australia should introduce a dual income tax system or a tax flow-through model for private enterprises

Tax Administration Research Centre (TARC)

Speaker:Brett Freudenberg, Griffith University
Date: Monday 12 June 2017
Time: 14.30
Location: 0.28 Streatham Court

Further details

Small businesses are a critical part of the Australian economy, and over the years a number of tax reforms have been implemented to try to assist them. A potential reform mooted has been for the introduction of a dual income tax (DIT) system. Pitcher Partners (an Australian accounting firm) proposed such a DIT system should be introduced for closely held companies. It would appear that a DIT system could be beneficial, as it has been implemented in a number of Nordic countries.

Also, in Australia there continues to be lobbying for the introduction of a tax flow-through company, with its most recently being raised as an option by Treasury as part of its Re:Think Discussion Paper which has the support of the major accounting and tax bodies. Part of the justification for these arguments is based on the fact that overseas jurisdictions have introduced these business structures. In particular notable examples are the United States’ S Corporations and Limited Liability Companies (LLCs); the United Kingdom’s Limited Liability Partnerships (LLPs) and New Zealand’s Loss Attributing Qualifying Company (LAQCs) and Look Through Company (LTCs). These business structures provide separate legal entity status and limited liability protection for their equity members; however for tax purposes the legal personality of the business structure is ignored with income and losses directly allocated to members. Such tax transparency is advocated as an economic ideal and advantageous for closely-held small businesses. Prior analysis of the overseas experience raised a number of concerns, including loss restriction rules, compliance cost, financing issues, tax avoidance and governance issues. This led to the conclusion that Australia may have little to gain from introducing such a tax flow-through company; although a model of a partial loss tax flow-through company was advocated.

This paper will reflect on recent evidence of Australian industry and government experts’ opinions as to whether the touted benefits of a DIT are likely to be realised by Australian small businesses. The paper will also reflect upon the experience of tax flow-through companies and consider what could be the preferred models of tax reforms for Australian small businesses. It will be argued that tax neutrality between business structures should be the core aim of any reforms going forward.