Tax system sets up SMEs to fail in a crisis – Atterton

06/08/2008 - 22:00

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Former academic Tim Atterton believes Australia's tax system sets up small business for failure in times like these by discouraging the retention of profits, distracting management and undermining strong balance sheets.

Tax system sets up SMEs to fail in a crisis – Atterton

Former academic Tim Atterton believes Australia's tax system sets up small business for failure in times like these by discouraging the retention of profits, distracting management and undermining strong balance sheets.

To maximise personal wealth creation, the owners of small-to-medium enterprises tend to control their businesses through trusts, which have to distribute earnings and leave little in the way of long-term assets directly linked to the operations themselves.

"As a result, growth is funded through excessive borrowings that the banks have been all too happy to provide," Mr Atterton said.

"However, this creates over-gearing on a massive scale that comes back and haunt the business sometime in the future, most likely when the economy begins to slow down."

Mr Atterton's concern is that the focus on tax minimisation comes at a high price in terms of management time and ultimately building a strong business entity separate from the people who created it.

"Small business is so busy managing tax," Mr Atterton said. "It is not to say businesses are not doing well, but it is for the short-term

"They are working hard and they think they are doing fine.

"None of them is looking at their balance sheets."

Mr Atterton's credentials for such a view are strong.

From 1990 to 2000, he was executive director of the Entrepreneurship Centre at Durham University Business School in the UK, and from 2000 to 2006 he was director of the BankWest Entrepreneurship & Business Development Unit at Curtin Business School, through which he worked with dozens of WA's most successful entrepreneurs.

For the six years to 2006 he was also chairman of the state government's Small Business Development Corporation.

More recently, Mr Atterton has been delivering federally funded business advice to companies in WA via his own consultancy, Business Dynamics.

He recently completed a road show of 20 regional centres lecturing to 750 small businesses, a process which reinforced his view that Australia's tax system sets up privately owned business for failure.

"All that did was reinforce this view that we have a short-term recipe for long-term national disaster," Mr Atterton told WA Business News.

For the origin of that line, Mr Atterton cites a Global Entrepreneurship Monitor survey by a number of institutions, including Victoria's Swinburne University of Technology, which found Australian SMEs were inadequately prepared for long-term growth.

Mr Atterton said the unit trust style of ownership -a divergence from the policies of Ronald Reagan and Margaret Thatcher which have been adopted across the US and Europe - affected many aspects of balance sheet management and led to the need for long-term personal guarantees from business owners.

"The vast majority of small businesses never look at their balance sheets, even at the end of the financial year," Mr Atterton said.

"Certainly, most do not understand them.

"As a result, they have no idea how weak their businesses may be and how vulnerable they are to a downturn in the economy."

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