An alternative taxation regime would tackle the complexity of tax laws and the compliance burden placed on small to medium-sized entities (SMEs), says a report jointly produced by the Institute of Chartered Accountants in Australia (the Institute) and Deloitte.

The report, which includes a submission to the federal government, proposes an entity flow-through (EFT) regime to help SMEs cut the red tape associated with current taxation laws.

The Institute’s Tax Counsel, Ali Noroozi, said that SMEs have for some time identified the complexity of the taxation system and the cost of compliance associated with it as one of their main concerns. One possible solution is the adoption of an entity flow-through (EFT) taxation regime. This comprehensive report, the first of its kind in Australia, has been prepared to spark debate about this particular solution.

“Currently SME groups predominantly use trusts to achieve flow-through taxation treatment -  but this has led to unnecessary complexity, uncertainty and has also created compliance concerns for SME groups,” Mr Noroozi said.

“Under the proposed EFT regime, instead of the entities being taxed, the tax effect of transactions would ‘flow through’ to the ultimate owners of the entity. Essentially, this results in the operating entity being ignored for tax purposes.”

Deloitte Tax Partner, Alexis Kokkinos, said that while the introduction of any new regime will present transitional challenges, an EFT regime would greatly simplify tax compliance for SMEs, particularly if they adopt the regime from the outset.

“Although the complexities of the current taxation regime can be reduced by using a partnership structure, this can expose SMEs to unlimited liability, unlike a corporate structure. To address this, the proposed EFT regime seeks to produce similar tax outcomes to a partnership, but in a way that allows SMEs to limit their liability,” Mr Kokkinos said.

“Essentially under the EFT regime, there would be no need for carry forward company loss provisions, fringe benefits tax provisions, family trust election provisions, trust loss provisions, franking credit rules, and various other integrity provisions that are a compliance burden for small business,” he said.

“The EFT regime also provides an alternative to the use of trusts, an area of tax law that has become increasingly complex and in many respects unworkable,” Mr Kokkinos said.

“The Institute has long advocated for simplification of tax laws and the easing of the compliance burden, particularly for SMEs. The Institute intends to use this report to work with the government and other stakeholders to develop appropriate solutions,” Mr Noroozi said.

Related links:

• entity flow-through submission report 
• podcast - Ali Noroozi, Institute Tax Counsel, talks to Deloitte Tax partner, Alexis Kokkinos, about the entity flow-through submission report