The Government has identified that the current provisional tax system does not work for small business so are looking to make it fairer and easier to apply.
Inland Revenue indicates that small to medium size businesses (comprising approximately 75% of all New Zealand business) are often struggling to meet deadlines and payment terms. This contributes to Inland Revenue's huge write off (somewhere in the region of $800 million to $ 1 billion) of outstanding taxes each year.
While the major changes to the regime have been widely reported, here are the six that we really like:
1. AIM - The Accounting Income Method
The current regime requires provisional tax be paid three times in each year based on the previous year's return. Under AIM payments will be due six times in each year and will be based on the current year's accounting information. This is a great move - tax payments should be closely linked to the time in which income is earned.
2. Reduction of Penalties and Interest
Overdue tax is currently subject to interest and penalties totalling 27% in the first year of a tax debt. Significantly, the monthly late payment penalty of 1% will now be wiped for new tax debts from 1 April 2017, meaning the effective rate of interest in the first year will drop to 15%. A company which doesn't accurately predict its provisional tax payments correctly (it's harder than you think!) will also now see a reduction in Use of Money Interest (UOMI).
3. Small Business Deductions
Under the new regime deductions will be simpler to calculate. Being a startup focussed accounting firm the proposals around standardising home office expenses and motor vehicles can only make accounts and tax preparation faster and easier.
4. Companies are Similar to Trusts for Income Distribution
A Company will be able to distribute tax paid income to shareholders in the same fashion that a Trust has been able to. This should mean a simpler provisional tax with no need to file some personal tax returns.
5. Greater Self Management for Contractors
The IRD wants to reduce compliance in terms of costs and time for taxpayers by making the tax system fairer and simpler. The changes to rules concerning voluntary contractor withholding rates should mean that contractors can take more control of their tax affairs, without relying on expensive outside advice or spending a lot of time figuring it all out.
6. Greater Emphasis on Accounting Software
More accurate and timely information relies on having accounting software in place, updated regularly throughout the year. It's assumed that software providers will adapt and provide the necessary tools to complete tax filings. So it might be time to buy Xero and MYOB shares?
Other things we’ve noticed
Are we headed towards one? New Zealand's tax system differs from other countries on the basis that we have 12 whole months to prepare tax returns for the prior year. In places like the United States, companies are given three and a half months to prepare their taxes or request an extension. January to March is therefore called “Tax Season”. More accurate & timely accounting information may mean we can ask the question - what do we need twelve whole months for?
While Inland Revenue's aim is to make tax obligations simpler, the introduction of more options for taxpayers means there will always be advantages in adopting over the other. This means there may be benefits for companies willing to investigate each option available.
As always if you have any questions about the new tax regime, please contact us.
Information provided to the best of the authors knowledge at time of publication. Laws are subject to change and independent advice should be sought. The above information is general in nature and should not be construed or relied on as a recommendation.