In 2012, the ABS estimated the black economy had grown to 1.5% of GDP or $25 billion per year in today’s dollars.
While the black economy is a long standing issue, new threats are emerging which have compounded the following problems:
- Loss of tax revenue.
- Unfair commercial environment penalising compliant behavior.
- Exploitation of vulnerable workers.
- Abuse of welfare system.
The Government has acknowledged that for every threat there is an opportunity and plans to use emerging technologies and “big data” to develop strategies to reduce the risks prevalent among the following activities in the black economy:
- Ghost businesses operating outside the tax system.
- Businesses, both large and small, failing to report all income.
- Failure to lodge activity statements and income tax returns.
- Paying employees cash.
- Non- reporting of rental income.
- Improper use of an ABN.
- Schemes involving GST fraud.
According to the Minister for Revenue and Financial Services, “the black economy is an insidious and wide ranging problem…and those contributing to the economy should not be subsidising those who aren’t”. The Government has established a Task Force and is currently consulting with stakeholders to develop a whole-of government approach to the black economy.
Company Tax Rate
There has been a lot of news in the media recently concerning the tax rate applicable to small companies. From 1 July 2016, companies carrying on business with an aggregated turnover up to $10M were subject to an income tax rate of 27.5%. Then from 1 July 2017, the turnover threshold increased to $25M.
The confusion arose when the Tax Office released a draft Ruling stating that companies that were engaged in passive investments (e.g. shares or property) could be carrying on a business and therefore be eligible for the income tax rate of 27.5% instead of 30%. Also, the reduced tax rate could be applicable to corporate beneficiaries of family trusts (bucket companies) and holding companies in a group.
The reduced income tax rate for small companies raises another issue when a dividend is paid to an individual shareholder from prior years’ profits that were taxed at 30%, as illustrated below.
As you can see in the above example, there is an overall increase in tax payable by individual shareholders.
The Government has indicated legislation will be introduced to remove any uncertainty, stating that only active trading companies should qualify for the lower income tax rate. de Blonk Smith Young will keep you informed of any developments with these proposed changes.
In the meantime, should you have any questions please contact John or David.