Reductions in income tax rates announced in the Budget may encourage small business operators to favour partnerships, trusts and other alternative structures over the traditional corporate vehicle, according to Deloitte tax partner Kel Fitzalan.
"The Treasurer estimates that more than 80% of taxpayers will face a top marginal tax rate of only 30% from 1 July 2005 which is of course also the company tax rate," he says.
"In the past, there has been an incentive for small business operators to incorporate due to the significant differential between the personal and company tax rates. This differential has now been eliminated in many cases, leaving taxpayers with a wider choice of business vehicles and lower compliance costs.
"For example, a husband and wife operating a small business will only wish to incorporate for income tax reasons where their combined income exceeds approximately $190,000 for 2005/06 and $250,000 for 2006/07 income years respectively.
"The existing marginal income tax rates currently encourage incorporation where the couple's combined incomes exceed $150,000.
"With less incentive to incorporate, compliance costs are likely to reduce.
"Of course, tax considerations should be balanced with other commercial factors such as ensuring the business proprietors have limited liability.
"Further, the abolition of superannuation surcharge means those small business operators able to fund their retirement are encouraged to make superannuation contributions."
While the measures are welcomed, Fitzalan says the simplicity, equity and fairness promised to small business operators in the 1999 Ralph Review is "noticeably absent from this year's Budget".