Business says inquiry into sector's struggles ignores key issue of tax

Business groups have dismissed a government inquiry into how to help the sector thrive, saying the exercise was doomed when tax settings and workplace laws were ruled out of scope.Relations between business leaders and the Albanese government are at a low ebb as the sector campaigns against a new minimum trust tax and an overhaul of capital gains tax, both of which critics say would stifle risk-taking and innovation in the private sector.But a review of how to promote "business dynamism" by the Productivity Commission, which published its interim findings on Friday, was specifically directed by Treasurer Jim Chalmers not to consider tax, industrial relations or business merger laws.Instead, the commission fixed its gaze on complicated regulations, gaps in insolvency laws, and barriers to venture capital for start-ups. Andrew McKellar, chief executive of business group ACCI, said these were worthy topics, but the terms were too narrow."Assessing business dynamism without looking at tax and workplace relations is like a doctor being blocked from checking the heart or lungs. You can ease symptoms, but you miss what is killing the patient," he said.Business Council chief executive Bran Black said tax and industrial relations were "the elephant in the room … We cannot fix Australia's productivity crisis by tiptoeing around the biggest barriers to investment and higher living standards."Window to amend trust laws nearly closedHearings will conclude on Friday into the government's 30 per cent minimum tax on discretionary trusts, which it intends to pass in the last parliamentary session of the year in mid-November along with a capital gains carve-out for start-ups.Neither has the support of business. ACCI and the small business body COSBOA argue trusts — financial vehicles that give users flexibility over their wealth and avenues to reduce tax — are vital for small businesses and should not face a 30 per cent tax rate.There are exemptions to the tax, and any trust can escape it by relinquishing some of its "discretion" to move money around, the main avenue for minimising tax. But business and accounting groups have said the carve-out was too narrow.Appearing at hearings on Thursday, representatives for Chartered Accountants Australia and New Zealand said there should be more flexibility about how businesses could access this carve-out and that discretion should be allowed for family breakdowns.Hearings on Friday will hear from several advocates of reform, including peak union the ACTU, welfare advocacy group ACOSS, and academics Sonali Walpola, Kathryn James, and Dale Boccabella.The trio specialise in tax law, including trusts, and the ABC understand their expertise has been influential in guiding the thinking of the Greens, whose votes in the Senate will be decisive and who broadly support the aims of the proposal, despite some concerns.Mr Boccabella told the ABC in October that the government should resist calls for exemptions where possible to avoid unintended loopholes, saying "a small minority of downtown lawyers and accountants" would exploit any gaps in the lawsSpender wants to broaden start-up carve-outThe government's proposed fix for start-ups under the new capital gains tax regime, an attempt to address the concerns raised by founders in the days after the May budget, has also met a mixed response.The proposal would let those deemed to be "investors in innovative start-ups" keep the current 50 per cent capital gains tax discount if they prefer it over the new inflation discount, which indexes an asset's initial value so that only real gains are taxed.Start-up founders were concerned this would see them effectively receive no discount when they sold their businesses because the initial value of a business starting from scratch is near-zero, leaving nothing to be indexed.Allegra Spender, a longtime advocate of capital gains tax reform who has become a prominent critic of the indexation approach, told the ABC the carve-out was a good idea, but was too complicated and applied too narrowly.Allegra Spender wants the capital gains tax carve-out for start-ups to be broadened. (ABC News: Fletcher Yeung)"Having run a business, I don't want to think about the government when I'm running a business … We don't want innovative businesses having to think about whether they fit the government's definition of innovative or not," she said."It's too targeted. Those firms who work at the cutting edge of productivity, like dynamic tech firms with large-scale appeal, they're the firms we're in danger of losing, but they are probably going to fall out of the government's criteria [for the carve-out]."Ms Spender's alternative is a flat 40 per cent discount for any "active" assets, a definition that already exists in tax law to cover assets used for running businesses.The government has pointed to Treasury analysis that suggests the indexation discount is not always harsher than a flat 50 per cent discount, and argues that giving start-ups the choice between the two regimes is more generous than the status quo.Many founders would also have access to the extra 50 per cent capital gains tax concession available to small businesses when they sell.Treasury Secretary Jenny Wilkinson has also pointed to a finding from the OECD, an international economic institution, that capital gains tax rates are not a major factor in a country's level of innovation.Dynamism on the declineThe Productivity Commission's interim report found evidence that Australia's businesses were less dynamic than in the past, measured in a drop-off in business entries and exits and job mobility."A key driver of productivity growth is the economy's capacity to renew itself through the entry, growth, restructuring and exit of businesses … While it is not the responsibility of government to create new businesses or entrepreneurs, policy settings can help."The commission's interim recommendations include a "tell us once" approach to the information businesses must give government regulators and the appointment of an official liquidator as a last resort for companies that cannot fund their own liquidator.