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Start-ups’ sticky problem

Monday, 1 August 2011 | By Leon Gettler

Red tape has been a perennial bugbear of small businesses. Start-ups are often unprepared for the blizzard of regulations they have to deal with once they launch, with compliance not high up the priority list for budding entrepreneurs.


Politicians on both sides have recently talked tough about reducing red tape and October’s tax summit has raised hopes that the issue will finally be addressed by Canberra.


But has the burden really got worse in recent years? And what can start-ups do to cut down the amount of time spent filling out forms?


Taxing times


The Henry Review identified a tax system that was cumbersome. A PwC survey shows that small companies are grappling with 53 different state and Federal taxes.


There are 32 state, territory and local government taxes that raise 9% of business tax revenue across Australia. The remaining 91% is raised by 21 Federal taxes.


According to PwC, 63% of business tax revenue is raised by income tax, comparing unfavourably with a global average of 38%.


The burden is not only in tax paid but in time and resources spent on compliance. It takes time away from running their business. And it also means many lines of reporting, often conveying the same sort of information.


As David Pring, a Deloitte Private tax partner says, it’s not just the number of taxes, it’s also those multiple reporting lines.


“Companies are doing their monthly or quarterly BAS reports, they are reporting all their income, their GST, their wages information,” he says.


“Then they have to provide an annual report which covers the same sort of stuff. Then they do their personal returns all of which have been generally previously reported to the Tax Office anyway.”


Red tape everywhere


For taxation purposes, companies need to keep sales records including invoices, credit card statements, bank deposit books and cash register tapes.


There are purchase and expense records, year-end income tax records, records relating to payment of employees including tax file number declarations, withholding declarations, PAYG payment summaries, salary sacrifice and superannuation records and records of any fringe benefits tax (FBT).


FBT declarations cover such areas as air fares, cars, expense payments, living away from home declarations, property benefit declarations, remote area holiday transport declarations, temporary accommodation declarations.


In addition, there are state payroll taxes, fire service levies and stamp duties. The kind of red tape will vary from sector to sector.


Retailers, for example, have to deal with: textile care labelling, safety standards, leather labelling standards, flammability labelling of fabrics, country of origin labelling, business name registration, ASIC compliance records, tax records, industrial relations laws, superannuation requirements, occupational health and safety regulations, poison register compliance, dangerous good compliance, heavy vehicle license matters where necessary and forklift drivers license.


Whether or not they need all of these will depend on the business. Retailers also need to be aware of such legislation as the Victorian Fair Trading Act, the Trade Practices Act and the Retail Leases Act.


With a large business, getting all this done is hard enough. For a small business, it’s next to physically impossible.


Too much, too young?


Critics say the Government needs to ask itself a simple question: does it want small business operators who are compliant, or does it want them to be profitable?


“Small businesses have to comply with the same Income Tax Act as companies like BHP and then they have additional sections in the tax act that apply to private companies,’’ Pring says.


“It’s a lot for them to get their heads around.”


Andrew Barrenger, who runs two hairdressing salons in Tasmania with his wife, says the tax rules are hard enough but what has made it even more difficult is the changes to the awards.


It basically meant that employers now need to manage and implement a completely different pay structure. This is a problem for businesses employing many people on different levels and awards.

“When they change the tax system, at least the Federal Government spoke to the likes of MYOB and they send you a patch,’’ Barrenger says.


“But when they change the award system, everything has to be done manually and there are so many different awards out there.”


Regulation bun fight


He says he has spent his time at workshops and he has talked to a number of people, and he was still no clearer on how to comply with the new rules.


“I still don’t know if I have it right. When you have to go to workshops and hold meetings just to comply and then still not be 100% confident you are complying, that’s just wrong,’’ he says.


He says the different pieces of red tape for small businesses and start-ups are quite small. But they all add up.


“You add it all together and you have this unwieldy beast where you are trying to comply with all the different regulations and paper work.”


The Coalition has seized on the red tape issue, and has condemned the Government for directing the Productivity Commission to look at the impact of regulation on small business, saying the Government is clueless on how to handle the problem.


Shadow Small Business Minister Bruce Billson says 12,000 regulations have been introduced since the last Federal election. Federal small business minister Nick Sherry has hit back, saying the Coalition had imposed the biggest red tape impost of all with the GST.


Barrenger says both sides of politics have failed to do anything about the problem. Politicians, he says, simply don’t get it. They deliberately keep things vague and nothing happens.


“Name me one of them who has actually stuck their hand in the air and said, ‘This is the red tape I am going to target’,’’ he says.


Teething problems


Council of Small Business of Australia (COSBOA) general manager Robert Mallett says there is a new addition to the growing pile of red tape for start-ups: paid parental leave.


Fully funded by the Federal Government, the Family Assistance Office pays the money to the employer who passes that on to the employee on leave, effectively turning the company into a payroll clerk and adding another administrative layer.


“We were asking the Government why they needed to introduce new red tape but they absolutely didn’t want to listen to us,’’ Mallett says.


“It means business owners have to spend more time managing this payment that should never have been touched in the first place.”


He says the changes to the awards are particularly complex, forcing employers to spend hours working it out.


“Working out how to pay someone is the least productive thing you can do,” Mallett says.


He says the amount of red tape has increased over the years. “At the end of the day, what you are trying to do is comply with the regulation, whether that’s state, Federal or local and they just keep adding to the problem,’’ he says.


Paperwork overload


Pring questions whether the amount of red tape has increased but insists that the Government certainly has not got rid of any.


He does not believe the amount of red tape discourages people from setting up businesses but entrepreneurs are not prepared for it.


“People have other reasons for entering business and I am not sure the compliance load would discourage, but once they have made a decision to enter a small business, they would certainly find themselves spending more time complying than they would otherwise expect to spend,’’ Pring says.


“They would be spending more time on paperwork than core business.”


He says the biggest red tape load would be the multiple reporting lines for tax, something he hopes will be addressed in the October tax summit.


To reduce the amount of red tape, he suggests business owners look at their structure.


“For a very small business, the partnership approach works well with top marginal tax rate not cutting in until $180,000 so for a husband and wife partnership, it could do it until their income exceeds $360,000,’’ he says. “Partnerships are a very effective structure.”


Apart from that, he says, there is little else businesses can do.


“I am not sure people can do a lot more to reduce red tape because they are still required to file and comply,’’ he says. “Having systems in place is always good but at the end of the day, they just provide information that you have to report.”