THE federal government has committed to cutting tax for small business but its discussion paper floats an even more radical long-term change - zero tax for small business.
"Instead of multiple concessions across the tax system, an alternative option that could be considered is to apply a lower or zero tax rate for small businesses," the paper says.
"A lower rate that replaced multiple specific concessions could encourage small businesses to spend their resources expanding their business, rather than managing their tax affairs."
But retirees and farmers could lose out because the trade-off would be to get rid of a range of existing tax concessions.
The most significant tax relief now for small businesses is the capital gains tax concessions, valued at about $1.4 billion in 2013-14.
There are four main concessions and they are primarily intended to provide small business owners with money for retirement.
The tax system also includes industry-specific concessions. Primary producers, for example, have access to special deductions, income averaging and farm management deposits.
"Extensive primary producer concessions may, in some circumstances, operate to prevent or discourage rational exit from the industry," the discussion paper says.
Other countries have demonstrated the strategy can work, the paper says. Canada, China, Japan, the US, Britain and Singapore have adopted strategies using low or zero tax rates to simulate small-business activity.
"In the Australian context, it may be possible to introduce a lower or zero tax rate on small companies to compensate for higher compliance costs and the removal of specific, small-business concessions," the paper says.
"Reduced tax rates on small corporations may also provide an easy source of finance to businesses by allowing them to retain more of their earnings and expand business activity."
However, the paper also points to the example of a failed experiment with low tax rates in Britain. For financial years 2000 and 20001, the corporate tax starting rate was 10 per cent. It was then lowered to zero for 2002 to 2005.
Companies with profits of £10,000 ($19,000) or less were eligible for the full benefit. The benefit was progressively reduced for companies with profits of between £10,000 and £50,000.
"Policy makers found that in the specific circumstances where it was introduced in the UK, it did not drive significant growth in small businesses or the economy. Instead, it introduced disincentives for companies below the threshold to grow and the disadvantages faced by small companies were not offset," the paper says.
Another option is to allow an immediate refund for tax losses, it says.
"Many start-up small businesses make taxable losses in their first years of operation. Refunding these losses would provide a cash-flow benefit to the business to help it grow and reduce the tax system's bias against risk aversion."
The federal government is already planning a tax cut for small businesses, regardless of whether they pay company tax or personal income tax.
As reported by The Australian Financial Review, Small Business Minister Bruce Billson might also grant small businesses accelerated depreciation of their assets under a small business package that will be a centrepiece of next month's federal budget.
Mr Billson has also said new employee share schemes would be more generous and streamlined.