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Economics Legislation Committee
06/06/2018

STRONG, Mr Peter, Chief Executive Officer, Council of Small Business Organisations Australia

[13:52]

CHAIR: I now welcome the representative from the Council of Small Business Organisations Australia. Thank you very much for appearing before the committee today. I invite you to make a brief opening statement, should you wish to do so.

Mr Strong : My opening statement is around something that I think the committee's heard me talk about before: removal of complexity. Complexity is the friend of the black economy. Complexity is a friend of people who want to do the wrong thing and an enemy of those who want to do the right thing. The tax cuts, as we see them, are progressive but need to be communicated better. I know that a lot of my members are confused about them at the moment. They're saying, 'Why should everybody pay the same, 32½ per cent?' I explained to them that if you're under 50, it graduates due to the way it's set up—someone earning under $50,000 may be paying 10 per cent tax and someone earning $190,000 may be paying 32.3 per cent tax but it graduates over a period of time. They got that very quickly once I explained the $18,000 on tax and the differences they have there. I think we need to communicate that better and explain the benefits.

As always, being in business, we know if you take too long to explain the features to someone, they get bored. But when you talk about the benefits, that's always a nice thing. Our employees, when we ask them to do extra work on a Sunday or overtime, quite often—I used to have it happen to me a lot—will say: 'Look, that pushes me into another tax bracket. Can you pay me in cash? Otherwise I don't want to do it.' When I explain to them they will get the money back anyway, because over the long period of a year it doesn't actually do that, they want the money straight away. I think having the same tax rate over such a large range of income just says to people, 'You're going to be taxed the same rate no matter what you do until you get to $200,000.' That is no longer a consideration. There's talk about how it works from there.

The other issue for small business people is that we quite often just pay ourselves a small amount of money until the business gets going. When we have a good year, we often have a really good year, and we pay an awful lot of tax in that year. This is something that says to a small business person there's a bit more certainty about planning as well. When you have a great year, you can plan on that. I think our argument will always be around the removal of complexity, which adds to transparency and makes the jobs of regulators and employers easier as well.

CHAIR: Thank you, Mr Strong. Just for the record, how many small businesses are there in Australia?

Mr Strong : It depends on who you ask. We always talk about 2.3 million small businesses. Given the recent changes, it could be as high as three million but I'd put it at 2.3 million.

CHAIR: How many people do they employ, roughly?

Mr Strong : They employ around five million people.

CHAIR: A number of small businesses, obviously, are incorporated as sole traders, which means the income earned by the businesses is essentially taxed at marginal tax rates. Can you talk us through how a cut in personal tax rates will affect small business owners?

Mr Strong : The effect on us will be much the same as the effect on the employees, because we eventually pay ourselves money, no matter how we do it—whether we're in a company structure or not—and we have to pay tax on that money. When we get above the thresholds, we pay that amount of tax. I think, last time I looked, the average income for a business in Australia is $2,000 above the average income of an employee.

CHAIR: So about $85,000 or $86,000?

Mr Strong : Yes, somewhere around there; it was about the same. That means there are lots of small business people not earning much at all and some doing very well indeed. There aren't many at either end. You'll find the great bulk of us are going to be anywhere between $50,000 and $150,000.

CHAIR: When I found out you were appearing today, I thought one of the reasons why personal income taxes would be beneficial to small businesses is that individuals have more money in their pockets; therefore, they've got more to spend in those businesses. But that doesn't seem to be what you're here to talk about today at all.

Mr Strong : I suppose that's a given. When there's more money out there, it doesn't matter who's getting more money. More money means more spending and people in hospitality and retail, et cetera, will be happier, and hopefully they'll see their share of it. But the big win for us, when I talk to my members, is that removal of the complexity and the fear people have of moving into tax brackets—the fear is false, but they do have that fear. We still have people on higher money paying higher taxes as a result of the way the system's been designed. That's where we stand. The other thing about the complexity is there are 70,000 businesses employing in Australia; this is the figure from the tax office, who don't use software. For the tax office, it gets very complicated indeed if you're jumping into different tax brackets, and they'll make mistakes. If they're going to continue not to use software, it's a lot easier. Once you get over a certain amount of money, it's the same tax rate.

CHAIR: I'll hand over to Senator Ketter but I might have some follow-up questions.

Senator KETTER: Thank you. Mr Strong, you seem to be getting feedback that small business owners are having difficulty getting workers to work longer, and the marginal tax rates are a disincentive for workers to work longer hours? Is that right?

Mr Strong : That certainly can happen, yes. There are two things: first, they don't want to do the extra work, and, second, they'll say, 'I'll do it if you pay me cash or if we manage it some other way, because I don't want to go into the top tax bracket.' I've had it happen to me. It's not common but it's not rare either. It's an area of concern in the hospitality industry in particular.

Senator KETTER: Penalty rates would come in handy to incentivise people to work extra hours, wouldn't they?

Mr Strong : That's what pushes them into the higher tax bracket. We're not against penalty rates, by the way; we're for them. Our argument is about the Sunday penalty rates. That's the issue: once they go into overtime or into Sunday work, they end up paying a lot more because they pick up the penalty rates. Often, if the penalty rate becomes, say, $30 an hour, they'll say, 'Look, if you give me $27 in cash I'll be happy.' We don't want to hear those sorts of conversations being had.

Senator KETTER: You mentioned the feedback you were getting. Your members were saying that paying 32½c tax between $41,000 and $200,000, on the face of it, sounded unfair?

Mr Strong : It sounds unfair, as I say, because it's got to be communicated better. In fact, if you earn under $50,000 it's around 10 per cent and it graduates through. At the moment, when you think of 32½ per cent, even some of my members think that's what they're paying all up, and obviously it's not.

Senator KETTER: But it is the fact that somebody earning anywhere between the $41,000 and $200,000 range is paying 32½c.

Mr Strong : In that range, they are paying that amount of money. I went through this with someone from the Newsagents Association. I said, 'When you look at how much they earn totally'—not the range they're in—'and how much tax they pay, that gives you the real tax figure of the percentage of tax they're paying, when you look at the total amount of income and the total amount of tax that they pay as a result of it.'

Senator KETTER: It not only sounds unfair, it probably is unfair, isn't it?

Mr Strong : Some of my other members talk about it, especially the ones who are much closer to this sort of activity. They talk about the fact that, as you have a lower income, you get family benefits part A and family benefits part B. A lot more benefits happen at the low-income area, including for small business people, I might add. They start to disappear as well as you get higher, and the people at the higher level tend to pay for the welfare that we have in the country, which is probably the way it should be. But, at the moment, the big winner for me is just removing the complexity. If I say to an employee, 'Can you work Sunday?' and they know they're going to get a lot more money and they know it's going to be taxed at the same rate they're being taxed now in that particular scenario, that's fine. That's going to remove, hopefully, the temptation to say, 'Pay me cash.'

Senator KETTER: Given the projections that we have on economic growth and wage growth in the budget papers, what do you say about how prudent it is to legislate for income tax now, for well down the track, when it's hard to predict where we're going to be as an economy at that time? We've also seen that the government's refusing to release annual costings for the package. What do you say about whether this is a prudent move?

Mr Strong : Again, I've talked to my members, but my experience is that, if you're planning that far ahead, it's called a plan and you'll probably have to change it at some stage because that's the way it works. It's the same in business. You would find that the bigger the business the further they plan ahead, with the full knowledge that they have to review that plan regularly to see if it's still working in that way. Given international tensions, if you're a mining company, obviously that impacts upon you. It's the same in a small business. If you're a retailer or in hospitality and you have a business plan and you feel very comfortable about that over three or four years, you know that someone may come along and put a restaurant next to yours. You would have to revisit your plan at that stage. That is what we would expect from government: long-term plans that are reviewed often.

Senator KETTER: I note we don't have a submission from your organisation, but have you consulted with your member organisations?

Mr Strong : Thank you, Senator. I've made the point, because we haven't put a submission in, of consulting with them and talking with the ones that are key: my board members, my chairman and my deputy chairman—the people that I need to consult with. That's where I found out that people are saying, 'It looks a bit unfair, doesn't it?' When I've talked to them about it, they've immediately said, 'Of course, you're right.' It's that classic reaction: 'I never thought of it like that.' The other people, much more closely involved in finances, wages et cetera, got it straightaway.

Senator KETTER: My question was: do you do a survey or do you write to your member organisations to ask for their impressions? What's your consultation process?

Mr Strong : Mine is either phone calls or, if I've got time, I write and send that to the members for comments. I can predict where the comments will come from because, as you know, our members are associations, so a lot of them may not have an interest in a particular thing, but the key ones do and they'll come back and say, 'Yes, we agree.' Sometimes they won't come back at all, which I assume is assent, because, if they do disagree, they will come back and say, 'We're not sure about this part of it.' The conversations I have are constant with my members over a whole range of different issues and they trust me to come along here and base my answers on all the conversations that I've had, and there have been a lot of them, I've got to tell you.

Senator KETTER: Do your members tell you they're happy with the design of the overall package? Is there any aspect of the package they find better or worse than others?

Mr Strong : I suppose we don't talk in the context of, 'We're happy or unhappy.' What we look at it is, 'Okay, we think this is going to work.' It's very complicated in tax, and we are forever gathering more information to inform what we may say when we come to events like this or when we write articles for newspapers and things like that. It's a good question. I'd never thought of it. Sometimes you're very happy if you get a big tax break; that's obvious. But in this particular case it's: Yes, we're comfortable with this. We think it's going to give some confidence to the community—this is what I have heard—and confidence is normally a good thing when it comes to the business.

Senator KETTER: But wouldn't your small business members be more interested in income tax cuts that put money into the pockets of people who are going to be spending in their businesses?

Mr Strong : My members have looked at this, and, as I've said, they're not jumping over the moon, saying, 'This is wonderful.' They're saying: 'We're comfortable with this. This looks good; it's a plan. There is money going back to the community.' And the main thing is, they say, that people will feel confident as a result of this. I've seen it myself in the past where governments have given people really good, extensive tax breaks, but it hasn't changed anything around confidence. Then you see other times when they might take tax away, but people are confident. It just depends upon where the community is and their understanding of where the economy is and also how governments and oppositions sell their particular plans.

Senator KETTER: On some analyses, we see some aspects of the package giving a lot of the benefit to higher-income earners rather than the majority of the Australian population, particularly the issue of removing the 37 per cent tax bracket. The Australia Institute calculated that 80 per cent of the benefit of that goes to the top 20 per cent bracket of income earners.

Mr Strong : I saw The Australia Institute report. I looked at the small business ombudsman's report as well—Kate Carnell said it was more of a letter. The impression I got is that, No. 1, tax is complicated. We find that with company tax. You're hearing from various people. They're dyed in the wool; they swear that these are the facts and that you can't argue with them, yet they're totally opposite in the way they are. I often go back to Treasury to look at what they're doing. But I also judge reports, including my own—and I've learnt this the hard way—on how complex the reports are. I've always found that, if I write a report to government about something and it gets convoluted, as I learned years ago when I was a young man of about at 55, that probably means that I'm not sure of myself. When I read reports that are straightforward and simple, I think, 'Okay, people know how to communicate this; I can take more notice of this.' When it becomes convoluted, I think, 'Why is it convoluted?' Once The Australia Institute went into the gender issues, I thought, 'That's not really what we want here.' So, I'm not sure about their figures. The figures from Treasury say: there is a tax benefit for people on higher incomes and there is a tax benefit for people on lower incomes.

Senator KETTER: Where do your members benefit the most? If you want to target tax cuts to those people who are going to spend it in small business, where do you say the greatest benefit is?

Mr Strong : As I say, the general feeling—and I'm quite serious with this; I'm talking accountants and bookkeepers as well. They're selling a service to walk-in customers, but they feel this creates confidence out there. We always feel: if you remove complexity, it's a lot easier to sell, if you know how to sell it.

Senator KETTER: Complexity is a very big part of what you're saying to us today. We heard earlier that a lot of your members don't have payroll software.

Mr Strong : Not a lot of them, but 70,000 of them, which is a high figure.

Senator KETTER: Seventy thousand sounds like a high figure.

Mr Strong : I suppose it's out of two million, but it is a high figure, I agree.

Senator KETTER: Doesn't payroll software, which does tax as part of that, take the complexity out of it for your members?

Mr Strong : It does because, in theory, you put your figures in and it does what you want.

Senator KETTER: It does it for you?

Mr Strong : Yes. And that's why we have software developers; they, hopefully, do remove the complexity. I do get concerned about the software developers. They're members of ours, and, let me say, I haven't consulted them on this. I couldn't get to them. But I still worry about them. That's complexity for them. They've got to go back into their system and fiddle with it. I know in the past, when there's been a tax change and they change the rates, we as businesspeople have to make sure that those tax changes come through our software. If you've purchased software outright, which is disappearing slowly, then that means you've got to go and purchase some more. If you're paying online, those changes should come through, which, as you say, removes the complexity for you. Software removes some of that, but it doesn't matter. The perception of the employee and the employer is the issue as well.

Senator KETTER: Yes, but what we've heard also is that this software can cost as little as $10 a month?

Mr Strong : That's what I've seen as well. And you can purchase that software, without a doubt, and then you've got to get to the 70,000 and convince them to do that. That's the issue. One of the comebacks from some of my members is, if they're happy filling it out in an exercise book and it works, why do they have to go and spend more money? Ten dollars isn't much, but it's still something. If I said to an employee, 'Ten dollars isn't much,' I know some people would tell me, 'Well, it is, Mr Strong.'

CHAIR: I want to ask one last question. There are a couple of different tax plans that have been proposed in the building in the last couple of weeks. From COSBOA's perspective, which do you believe is fairer: a tax plan that provides tax relief for all taxpayers or a policy that provides relief to some but also increases taxes on thousands of taxpayers, right up and down the distribution curve, according to their individual circumstances, irrespective of their income? It might be that they invest in property and earn wage income but not investment income or it might be that they are small-business owners that are in a family tax structure or rely on refundable franking credits in retirement or own a self-managed super fund weighted in Australian shares but not foreign shares. I would have thought, if the issue were complexity, you would prefer a very basic personal income tax cut rather than this multitude of different tax changes that would effect an outcome.

Mr Strong : Thank you. Exactly. The complexity of change is something that small business struggles with. Some of them won't know a change has happened for 12 months, and we may say they're fools and they should look it up et cetera, but they're doing a lot of different things. As you know, I'm talking complexity here. On that issue, the other thing my members say constantly is we need bigger tax reform. I know you hear this all the time, but that's the opportunity. If we said, 'Let's talk about complexity and fairness,'—we've got people in the community who need support in all these welfare areas, and we totally support that because, again, they come into our shops and do things—it's almost like there are two separate issues. I know we need to fund welfare from tax, but that doesn't mean it needs to be complicated to do so.

CHAIR: Thank you very much for appearing before the committee today.