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Small businesses are a critical part of the Australian economy, and over the years, a number of tax reforms have been implemented to try to assist them. A potential reform mooted has been for the introduction of a dual income tax (DIT) system. Pitcher Partners (an Australian accounting firm) proposed such a DIT system should be introduced for closely held companies. A DIT system could be beneficial, as it has been implemented in a number of Nordic countries.

This article reports on a study of Australian industry and government experts’ opinions as to whether the touted benefits of a DIT are likely to be realised by Australian small businesses. Overall, while there could be some possible benefits, concerns were raised about required integrity provisions that could adversely drive up compliance costs, as well as the need for extensive education programs for both advisors and small business operators.

Essentially, a pure version of a dual income tax system (also known as a Nordic tax system) splits business income into two components: capital and non-capital (labour or earned) income. The capital income amount is taxed at a lower rate, which is approximately aligned with both the corporate tax rate and the lowest individual tax rate (around 27% to 32% in the Nordic countries). Non-capital (labour) income is taxed at the progressive marginal tax rates.

To split business income, the rule is to first calculate the return on business assets, which is regarded as capital income, and then to treat the balance of the business profit as labour income. The imputed rate of return is set in accordance to the applicable interest rate on average government bond plus the risk premium.

In their 2015 Tax Discussion Paper, Pitcher Partners proposed a dual income tax model, which required a reduction in some tax rates, including the top personal tax rate down to 30%, to be in line with the corporate tax rate (up to a threshold of $312,500 and 45% above this threshold). Such a change in the individual tax rates was estimated to cost the government between $13 billion and $22 billion in lost tax revenue. If both the corporate and the marginal tax rates were to be reduced to 27%, for private companies only, this may result in further lost tax revenue.

Pitcher Partners argued that the potential loss in tax revenue may be compensated by an increase of the Goods and Services Tax (GST) rate to 15%. Pitcher Partners suggested that this could increase government revenue by approximately $27 billion, assuming that the GST base is kept constant.

The DIT Model proposed by Pitcher Partners is similar to the Nordic system in that it requires the split of business income into capital and labour incomes, applying a flat tax rate on capital income and progressive tax rates on labour income. However, the unique feature in the Pitcher Partners’ Model that differs from the Nordic tax system is that the top marginal tax rate on labour income is aligned with both the corporate and capital tax rates, whereas, in the DIT systems in the Nordic countries the lower marginal tax rate on labour income is aligned with both the corporate and the capital tax rates.

Research methodology

The primary research question for this project was: Would Australian small businesses benefit from a dual income tax system? In analysing this question, a number of sub-questions are considered, including how a DIT would likely affect complexity, compliance costs and finance for Australian small businesses. This is considered for both the Nordic and Pitcher Partners’ DIT Models.

Delphi technique

A modified Delphi technique was adopted to gain a detailed understanding of and insight into whether Australian small businesses are likely to benefit from the introduction of DIT. As small business owners are not currently using a DIT system and therefore potentially have little or no practical understanding of the DIT and its implication for their businesses, the Delphi technique of interviewing experts in the small business field was chosen.

By interviewing experts in Australian small business issues, it was thought they could critically evaluate the potential implication of a DIT. Delphi is a widely employed research method in many disciplines including economics and social science. It has been considered a reliable qualitative method ideally utilised in situations of uncertainty. It is also widely used for forecasting, gaining information for the decision-making process, or obtaining strategic views.


For this project, 14 participants were selected from a broad background, three from the Australian Tax Office (ATO), three tax professionals (accountants), four tax academics, two lawyers and two Treasury officials. Criteria for selecting the participants were that they had at least five years’ experience with small businesses and were aware of issues challenging small businesses.

Major findings

In general, it seems that there was very limited to average understanding of DIT by the Australian experts. This would indicate that any implementation of a DIT would require a large educational program for both advisors and the small business community.

When considering the impact of a Nordic model, it was found that the experts considered that it would most likely have a negative impact on small businesses, mainly due to the complexity in splitting business income and the anti-avoidance rules for income shifting between labour and capital incomes. Concerns were expressed about a re-education process on how the system works and the costs due to changes in accounting systems.

When considering the impact of the Pitcher Partners’ DIT Model, experts expressed a conflicting view as they thought that the complexity and compliance costs would increase at the implementation stage of the system, although they identified that compliance costs would reduce over time. Areas of complexity were due to the differential treatment between different sorts of income, and the complexity in applying the model to businesses operated through trusts.

The respondents also identified that the 45% tax rate is very high for small businesses and could provoke income shifting from labour income to capital income. Equity issues were identified if capital income was to be excluded from the progressive marginal tax rates. Potential benefits identified were improved tax neutrality in taxing all capital income in the same way, tackling the problem of negative gearing, and promoting simplicity by removing the small business capital gains tax (CGT) concessions.

The results of this study did not show any impact on finances for small businesses, as there was a sense of uncertainty of the potential effect. The experts perceived that a dual income tax system would be problematic to implement for Australian small businesses due to complexity in splitting business income, increased compliance costs, anti-avoidance rules, re-education and amendments to accounting software systems.

Overall, it appears that the introduction of a dual income tax system for Australian small businesses is not supported by the current findings. Accordingly, the claims that Australian small businesses could benefit from the implementation of a DIT appear to be problematic.


Small businesses are a vital part of the Australian economy, but due to their size and inherent characteristics they can face a number of challenges. Successive governments have used the tax system to try to assist small business, although, many question whether these initiatives have been successful.

Experts raised concerns about the complexity and compliance costs, especially in relation to rules about splitting income between capital and labour, as well as integrity measures to minimise the manipulation between these components. Taking all of these factors into consideration, it was argued that Australia should not introduce a DIT Model.

This study contributes to a greater understanding on numerous aspects: what precisely a dual income tax system is in small business taxation, its potential to assist small businesses, and the potential to apply such a system to Australia. The magnitude of such an implementation needs to be carefully considered by the Australian Government. Governments can be subjected to pressure to provide small businesses tax concessions. However, if such measures are poorly conceived, they can create further complexity.

With this understanding and knowledge, it is hoped that improved policy development can arise. Any development with small business taxation should strive for greater tax neutrality, and in this way encourage and enhance small businesses’ performance in the hope that this sector will remain a strong contributor to the Australian economy.


A full version of this article was published in the Australian Tax Review: Barbara Trad and Brett Freudenberg. (2018). A Dual Income Tax System for Australian Small Business: The experts’ verdict, Australian Tax Review, 47(1): 54-78. See:

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