A new small business entity

The 2015 Re:think paper discussed the virtues of a US ‘S-Corp’ type entity for SMEs in Australia.

CPA Australia is of the view that it would be appropriate for a new type of entity be introduced into our tax regime that would have some of the features similar to that of a S-Corp, such as limited liability and streaming/ flow through of income to beneficiaries, but importantly it would also need the additional feature of being able to retain income that would be subject to income tax at non-punitive rate.

The thinking behind this is that at present a typical and relatively ordinary commercial family business structure

would involve:

1. a corporate trustee

2. a discretionary trust, and

3. discretionary beneficiaries including a corporate beneficiary.

The introduction of a new entity that has the features of limited liability, allows income streaming like a discretionary

trust, allows income retention and is taxed at the prevailing company tax rate – would potentially eliminate the need

for three entities, reducing the entity structures required in this example from three to one.

The idea of a new SME entity should not be confused with the proposal from Review of Business Tax of ‘taxing all

trusts as companies’ over a decade ago. The Board of Taxation’s review of the so-called entity tax regime

appropriately put that proposal to rest. That proposal remains inappropriate when one consider the myriad of

different types of trusts with differing objects (such as child maintenance trusts) and the perverse outcomes that

would result from such a measure.

Certainly the introduction of a new entity may add to complexity. However it may be one small step that enables a tidy-up of much of the complexity small businesses continually face relating reinvestment of business profits in a business and the private company loan/ deemed dividend rules, amongst other things.