Changes to how SMEs pay tax

The Government has recently announced a package of proposed tax changes that intend to reduce compliance costs and make tax simpler for businesses. The package is part of the Inland Revenue’s big picture ‘Making Tax Simpler’ initiative that aims to modernise and simplify the tax system. While the proposals will generally apply to all businesses, the changes are expected to benefit small businesses the most.

Tax compliance costs are relatively high for small businesses who play a crucial role in the New Zealand economy. Approximately 97% of enterprises in New Zealand are small businesses, who employ around 30% of the workforce. For these entities, the question of whether ‘close enough is good enough’ is being raised, whereby simplifying the tax compliance process and reducing compliance costs could have wide-reaching benefits for many New Zealanders. The changes proposed within the Governments tax package are outlined below.

Changes to provisional tax

The changes propose to increase the existing use of money interest (UOMI) safe harbour threshold for individuals from $50,000 to $60,000 and allow it to apply to all taxpayers. This effectively means that all taxpayers who calculate and pay provisional tax using the standard or ‘uplift’ method would only be charged UOMI from their terminal tax date provided their residual income tax is below $60,000. Larger taxpayers, who fall outside the safe harbour threshold and pay tax using the standard option, would instead pay UOMI from their last instalment date.

Small Businesses (turnover of $5m or less) will be able to use an “Accounting Income Method” (AIM) to calculate and pay their provisional tax based on the income to date in their accounting software. Businesses registered for monthly GST returns will pay provisional tax monthly. However, businesses who file their GST returns on a two-monthly, six-monthly basis or who are not registered will pay provisional tax every two months.

Self-management and integrity

The changes propose to let businesses:

  • Allow contractors to elect their own withholding tax rate (minimum 10% for resident contractors, 15% for non-resident contractors),
  • Extend withholding tax to labour-hire firms, and
  • Introduce voluntary withholding agreements where contractors can agree to withhold tax as income is earned to manage provisional tax obligations.

Other changes

Other proposed changes include:

  • Removal of the monthly incremental 1% late payment penalty for new debt;
  • Increase the threshold for taxpayers to correct errors in returns from $500 to $1,000;
  • Remove the requirement to renew resident withholding tax exemption certificates annually;
  • Increase the threshold for annual fringe benefit tax returns from $500k to $1m;
  • Modify the 63 day rule on employee remuneration to reduce compliance costs; and
  • Allow small companies providing motor vehicles to shareholder-employees to make a private use adjustment instead of paying fringe benefit tax.

There are also a number of information sharing arrangements proposed in the changes, i.e. reporting of tax debts to credit reporting agencies and information sharing with the Companies Office.

Most measures are intended to apply from 1 April 2017, with the exception for provisional tax payment changes, which have a proposed implementation date of 1 April 2018. IRD is currently seeking feedback from the public, with submissions due by 30 May 2016.