Putting tax reform at the top of the political agenda is a long-overdue outcome arising from the recent Federal economic reform roundtable. However, we cannot afford to ignore SMEs in a broader conversation about the taxation incentives needed to increase productivity in the Australian economy.
What’s missing: Scale and its productivity benefits
One thing that wasn’t spoken about at length was the productivity benefits from helping small and medium businesses grow.
Australia has around 2.5 million businesses, of which the vast majority (over 97%) have fewer than 20 staff. Above this are around 68,000 mid-sized businesses employing up to 200 people and just over 5,000 large businesses with more than 200 employees.
The data is clear that larger firms are more resilient, less likely to fail, and are significantly more productive. For example, a research study by CEDA found that larger housing developers are significantly more productive than smaller ones, with Australian construction firms employing 200+ staff generating 86% more revenue per worker than those with five to 19 employees.
So why don’t more businesses grow? Because the current system actively discourages it. Payroll tax is the obvious example. As soon as a business owner considers expanding their workforce, they hit a step-change in cost. Payroll tax, as well as a raft of other legislative obligations ranging from workplace health and safety standards to insurance, discourage small businesses from growing.
Cutting the corporate tax rate for small businesses from 25% to 20%, as some have proposed, won’t solve this, as it provides no incentive to scale. If we’re having a tax reform conversation, payroll tax, a direct barrier to headcount growth, should be the first thing to scrap to allow more firms to expand with confidence.
In short, if we want productivity, we must stop penalising ambition.
What we can do more: Incentivise AI adoption and R&D
We’re already seeing significant productivity benefits from AI, including streamlining admin and mundane, time-consuming tasks. According to OECD, more recent estimates of GenAI “indicate large effects on worker performance in specific tasks, ranging from 10% to 56%”. Even at the lower end of the scale, the net benefit is material.
However, bandwidth and capability are barriers for SMEs. Firms with fewer than 30 staff simply don’t have the expertise or resources to implement AI systems without support.
The government should provide that support in the form of targeted incentives. During COVID, accelerated asset write-offs were successful in driving infrastructure investment. The same approach could be taken for AI, with instant deductions for expenditure on AI training, integration, and systems implementation. This would stimulate the nascent industry of trainers and integrators as well as help to ensure that productivity gains flow through the broader economy.
Simultaneously, R&D tax incentives need reform. Currently, businesses must complete projects and close out the year before receiving a benefit. Some European countries have a much more successful model: businesses submit proposals upfront and receive credits earlier, and are only penalised if they fail to deliver.
This results in better planning and delivery of actual R&D projects as well as reduces the risk of gaming of the system. By front-loading incentives, R&D could be transformed from a retrospective accounting exercise into a genuine driver of innovation.
What we need to work on: Reset our mindset to celebrate growth
Policy change won’t be enough if the national culture doesn’t shift. As a nation, Australia has never really celebrated business growth. We have a “tall poppy syndrome” problem, which tends to tear success down, undermining ambition and discouraging risk-taking.
Compare this to countries overseas affirming growth and putting significant funds behind promising university research so it can be commercialised. Good ideas should be turned into global businesses; entrepreneurs shouldn’t be saddled with crippling tax bills before their equity is even liquid.
What we need to do is embed a culture of success, from the earliest levels, by bringing the concept of entrepreneurship into schools and seeding ambition early. We should encourage and celebrate success stories such as Canva and Atlassian.
If we want to improve productivity, we need to create an environment where taking risks, hiring staff and scaling up is not seen as reckless but as the backbone of national prosperity.
What we can do now: Making an immediate start on productivity
One of the problems with the debate around productivity is that it drifts into five or 10-year horizons. It’s one thing to talk about doing more work around research and development or alleviating planning, but we need to make a move on productivity today. Businesses need near-term moves to make it easier for them to invest, innovate and grow.
Scrapping payroll tax, front-loading R&D incentives and providing instant write-offs for AI adoption would do this, as pragmatic, immediate steps. Paired with a cultural shift towards celebrating growth, we could finally unlock the productivity problem that’s been holding us back.
By Ryan Williams, director of the Australian Centre for Business Growth
This article was first published by Smart Company