Max Newnham - Tax For Small Business: A Survival Guide

Contents

First published 2008 by Wrightbooks

an imprint of John Wiley & Sons Australia, Ltd

42 McDougall Street, Milton Qld 4064

Office also in Melbourne

Max Newnham 2008

The moral rights of the author have been asserted.

National Library of Australia Cataloguing-in-Publication data:

Author: Newnham, Max.

Title: Tax for small business : a survival guide / Max Newnham.

ISBN: 9780731408344 (pbk.)

Notes: Includes index.

Subjects: Small business Taxation Australia.

Dewey number: 336.2070994

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above.

The material in this publication is of the nature of general comment only, and neither purports nor intends to be advice. Readers should not act on the basis of any matter in this publication without considering (and if appropriate taking) professional advice with due regard to their own particular circumstances. The author and publisher expressly disclaim all and any liability to any person, whether a purchaser of this publication or not, in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance, whether in whole or in part, upon the whole or any part of the contents of this publication.

Acknowledgements

To write a book like this that deals with a highly technical subject such as tax requires a lot of research and help. Several people helped to ensure that I did not wander too far from the letter of the law in search of the vibe:

• Max Warlow from Max Warlow and Associates Pty Ltd was invaluable when it came to help with GST and the taxes levied by the states and territories.
• John Sesto and Sasho Slaveski from J P Sesto and Associates, being lawyers, kept me on the right side of the law when it came to income tax generally, and more particularly the small business capital gains tax concessions.
• Andrew Pugsley from TaxBiz Australia Pty Ltd read over the chapter on FBT and made sure that it was not only technically correct but also had all of the commas in the right places.
• Kristen Hammond from John Wiley & Sons Australia Ltd made sure that some of the more technical chapters made sense and did not become a good cure for insomnia.
• Lastly my wife Liz once again shouldered more than her fair share of the domestic duties while I wrote the book.

CHAPTER 1

Tax through the ages

Business owners who ignore their tax obligations can end up suffering in different ways. They can end up paying too much tax due to not organising their affairs properly, or even worse, be audited by the Australian Taxation Office (ATO) and discover too late that they have made mistakes that result in large fines and penalties.

In trying to understand how tax affects a business, it helps to have an understanding of how tax has been imposed over the years, and how people in the past have tried to find ways of minimising the impact of one of the inevitabilities of life. When you look at the history of taxation, you realise, in fact, that with its first imposition came tax minimisation and avoidance. Tax avoidance is effectively cheating a government of its tax revenue by, for example, not declaring cash sales. Tax minimisation, on the other hand, is a person or business organising their affairs, within the law, to pay the lowest amount of tax possible. This principle was first backed by an eminent British judge in the 1800s, who ruled that it was everyones right to organise their affairs so that they did not pay the maximum amount of tax.

Taxation BC

Income tax as we know it today is a relatively new innovation, but tax has been around in other forms for thousands of years. One of the earliest examples was a tax on the consumption of cooking oil in the time of the Egyptian pharaohs. The scribes charged with collecting the tax visited households to ensure the occupants were not using lard or other forms of fat instead of oil and thus paying less tax.

The Romans also levied taxes, including customs duties at ports, on both imports and exports, and an inheritance tax that was used to provide funds for retired soldiers. Julius Caesar imposed a 1 per cent tax on the sale of slaves that was eventually increased to 4 per cent.

Taxation in Great Britain and beyond

The earliest forms of tax in Great Britain were imposed on products and land. The land taxes took many forms: one was based on the land area a house occupied, another on the number of windows a house had. This last tax led to an early form of tax minimisation by homeowners they bricked up windows. It may have meant less light for the house, but at least they were minimising tax!

Even a feature of the distinctive Tudor-style houses was prompted by a desire to minimise tax. These houses are famed for their use of painted white panels with wood, but many also have a ground floor smaller than the upper storeys, which creates a wide overhang over the street. Evidently, this was done because the less land the ground floor occupied, the lower the property taxes were.

The earliest form of income tax was first introduced in Great Britain to finance the war against Napoleon in 1799. There was an annual tax-free threshold of 60, with a tax rate of 10 per cent on incomes above that. Not surprisingly, it was an unpopular tax that many people found ways to avoid, and instead of collecting the expected 10 million in the first year, the British government only got 6 million.

When a peace treaty was signed with France the tax was repealed, but then reintroduced when war broke out again. It is this second tax act that is the model for most modern tax systems. In addition to imposing tax on different classes of income, such as property, farming, retirement annuities, self-employed and wages, there was also a withholding tax on interest income paid by the Bank of England.

This second version of income tax was, again, extremely unpopular, and after the victory at Waterloo it was not only repealed, but all records associated with it destroyed. Although unpopular, its design had been shown to be one of the fairest ways to impose income tax, in that those less fortunate paid less tax.

The income tax system currently operating in the UK was introduced in 1842 as another temporary tax, supposedly for only three years. Even today its still a temporary tax that expires each year on 5 April, and must be reapplied by an annual finance act.

The history of American income tax is similar to that of the UK. Income-tax legislation based on the original English 1799 tax was drawn up to fund the war of 1812, but never imposed. It wasnt until the Civil War that a progressive income tax was actually introduced. Again, tax avoidance must have been high, as only 276 661 people filed tax returns in 1870, out of a total population of approximately 38 million!

Australias taxation experience

Australias experience with taxation has been very similar to that of other countries. The original taxes were on goods and services and not income, and, as in the UK and USA, income tax was introduced to fund involvement in a war.

Tax in the colonies