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National outlines tax changes aimed at reducing business compliance costs and encouraging capital investment

National outlines tax changes aimed at reducing business compliance costs and encouraging capital investment
Andrew Bayly

National is campaigning on making a number of tweaks to the tax system to help businesses.

One of its proposals is a temporary measure to incentivise businesses to invest in productive capital assets.

Another is a permanent measure, in line with what the Government is already doing, to make it easier for start-ups in particular to raise capital.

The remainder of National’s proposals are smaller changes largely aimed at improving efficiency, reducing compliance costs and updating tax thresholds that haven’t been updated for years.

Bar the wage subsidy, National’s Small Business spokesperson Andrew Bayly said the Government’s Covid-19 response is largely aimed at helping businesses take out debt to ease cashflow pressures. Some of his tax tweaks are focused on encouraging capital investment.  

Separately, National is proposing to “encourage”, not force, KiwiSaver providers to invest a small portion of their total funds in appropriate private equity/expansion capital opportunities involving New Zealand companies.

Bayly said Milford and Booster are among the few providers already doing so. He believed some providers held off investing in these sorts of companies due to concerns around liquidity.

Coming back to tax, the tax accountants interest.co.nz spoke to said National’s proposals were sensible and helpful for businesses, but not earth-shattering. Some changes are recommendations made by the Tax Working Group.

Here is a rundown:

  • Lift the threshold to expense new capital investment from $5000 to $150,000 per asset.

Bayly said this measure would be reviewed after two years and would only be applicable to “productive assets”. So a business couldn’t buy a fancy car and write it off as an expense.

This change is aimed at incentivising businesses to invest in capital assets and provide some economic stimulus.

Australia and the US have made similar temporary changes in response to Covid-19.

Tax accountant, Terry Baucher of Baucher Consulting characterised the change as “extremely generous” but helpful for businesses.

  • Increase the provisional tax threshold from $5000 to $25,000.

This change would follow the Government increasing the provisional tax threshold from $2500 to $5000 in response to Covid-19.

The aim is to lower compliance costs for smaller taxpayers and allow them to retain cash for longer.

However Baucher worried the change could be problematic.

"Small businesses often spend that tax and then find themselves scrambling. That was one reason the $2,500 threshold remained unchanged for so long," he said.

It would also likely reduce the Crown’s tax revenue fairly significantly. The Government expected its change from $2500 to $5000 (let alone $25,000) to reduce the number of taxpayers paying provisional tax by around 95,000.

  • Raise the compulsory GST threshold from $60,000 to $75,000.

Baucher maintained this was overdue. The $60,000 threshold has been in place since 2009.  

  • Implement a business continuity test (rather than ownership test) to allow the carry forward of tax losses.

The Government has already signalled it would make similar changes.

The change would help companies raise equity without risk losing their existing losses. It would be particularly helpful for start-ups. The Tax Working Group recommended some changes be made in this space.

  • Ensure Use of Money rates charged by IRD more properly reflect appropriate credit rates and increase the interest rate paid on amounts owed by IRD to its customers.

The IRD applies these rates to those who underpay or overpay tax. It uses various formulas to charge under-payers of tax more in interest than it pays over-payers of tax. But the formula can work in funny ways.

Last year interest.co.nz wrote about how while the Official Cash Rate was falling, the IRD ended up hiking interest rates payable by under-payers of tax and cutting rates receivable by over-payers of tax.

  • Increase the threshold to obtain a tax invoice from $50 to $500, to reduce compliance costs.

Baucher characterised this as a “generous” but doable change. The threshold has been $50 since 1993.

  • Consolidate the number of depreciation rates to reduce administrative burden.

Another change advocated for by the Tax Working Group.

  • Review depreciation rates for investments in energy efficiency and safety equipment.
  • Allow businesses to expense an asset once its depreciated value falls below $3000, as opposed to having to continue to depreciate it until its depreciated tax value equals zero.
  • Change the timing of the second provisional tax payments for those businesses with a 31 March year-end to 28 February (rather than 15 January).

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35 Comments

Not bold enough simplify things and cut the company tax rate to 12.5%

Can't have that mate.. the "Company" is already paying all my expenses and then I'd have to leave all my wages in the Company's accounts too. I'm only pulling wages cos the Tax rate is lower for personal earnings.

New Zealand has one of the highest Company collected tax rates in the world as a % of GDP its need of serious overall reform

https://croakingcassandra.com/2018/03/22/so-much-company-tax-so-little-i...

But we have imputation credits on dividends paid... so it's not really comparing apples with apples.

An additional 15% tax credits allowed to businesses for R&D expenditure is the way to go. I don't think a blanket reduction of corporate taxes is necessary.
The government should instead introduce more credits and write-offs for businesses investing in productive capital and innovation.

Most of these ideas are just tinkering around the edges in reality. Any SME with a marginally effective accountant will already be taking maximum advantage of the existing tax laws and Nationals proposals won't make very much difference.
Raising the GST threshold is actually a red herring.. "if you ain't registered you cain't claim". Anyone in "business" is missing a 15% clawback on expenses if they're not registered.
Increasing the Capital Investment threshold is bogus.. Most businesses, if they are smart, will expense a "new" capital outlay as repairs and maintenance if it's under 5K.
Increasing the PT threshold is a recipe for disaster.. if you can't pay your PT now (@<5K) you should just go work for the "man"

Agree with your sentiment, but technically you are breaking the law if deducting assets as R&M. The $5,000 limit is better than the previous unworkable $500 limit but it temporary and will be $1,000 from next year, which is next to useless. The govt should raise it to at least 10k going forward. There is a lot of lost productivity in accounting firms discussing what is R&M vs assets, and trawling through clients' ledgers and reclassifying items to comply with the existing onerous tax rules. Asset schedules become cluttered and meaningless with hundreds of low cost 'assets'.

"technically you are breaking the law if deducting assets as R&M." I don't know.. repowering a tractor with a new higher powered engine is still R&M, so is replacing a sagging 3 wire fence with a post and rail fence. Accountancy firms don't discuss the nuances between R&M and Capital outlay.. they just do what they are told and treat book entries as factual . Remember they all have disclosure and treatment clauses that put the onus back on the client. Strictly speaking , I could buy a helicopter and call it a "fert spreader".

Maintenance is usually replacing like with like, or repairing to the same state the asset was in when purchased. Improving on an asset does open yourself up to scrutiny by the IRD should they choose to audit you. But you're right in the sense that it's ultimately the taxpayers job to decide what risk you take with the IRD as the accountant has usually contracted out of liability for those sort of decisions.

Accountancy firms definitely discuss the difference between R&M and capital outlay - this has been an IRD focus when it comes to property in recent years, and moreso at a GST return level. If you want to deviate from what they recommend, you'll usually be asked to bear the risk and acknowledge you're insisting on a treatment different to the one they advise, or if you're determined to commit outright tax fraud as above, you'd be dumped as a client. No one would trust you to pay fees relating to an audit or a risk review, so the engagement instantly becomes more trouble than it's worth.

I agree with your point about property R&M but as for Capital outlays there is no difference to the GST treatment. The difference arises at the end of year so it's more of a tax treatment. In my example above the fence is still a fence but the post and rail is of a higher resale value than the 3 wire one. They would be roughly the same installation costs, depending on length of course. The tractor engine is a no brainer, replacing an old dead diesel with a newer model same displacement motor is R&M but the new motor would be much more efficient and deliver more power. We're not talking Tax fraud, merely the interpretation which is always subjective.

"Strictly speaking , I could buy a helicopter and call it a "fert spreader".

That doesn't seem like something you could stretch under 'subjective interpretation' :)

Haha.. yeah you might be right, but it still has the ability to be used as a fert spreader - it's how I get the fert on now, unfortunately I don't own it or fly it. And I'd definitely have to capitalize it anyway - certainly couldn't call it R&M.

:)

Raising the GST threshold - whoopee? GST is just a tax gathering exercise done on behalf of the government. Want to help business (and the rest of low income serfs) - lower GST to 10%

I think you missed the point frazz, the GST "threshold" they're talking about is the one for GST registration.. not the GST levy

Plus National were the ones who actually increased GST to 15% in Oct 2010 to pay for income tax cuts, so I can actually see them keeping their promise. John Key said in the 2008 elections regarding tax & GST: “National will not increase GST and will not raise tax.”
Can we really trust National again? No! Not on your Nelly!

Article from Oct 2010: Key denies 'flip flop' over GST increase. "Away from the fight over the flip flop, National is making a pledge on its moves to increase GST to 15 percent. Mr Key and Finance Minister Bill English both today promised compensation to the low and middle income earners and those on benefits will fully cover the increases." https://www.newshub.co.nz/general/key-denies-flip-flop-over-gst-increase...

No point missed...tinkering with GST registration or not registered makes zero difference to businesses. Sounds great yet in reality zip benefit...

Less admin burden if you're starting out - very much a year one thing for small businesses and sole traders, but still beneficial if you're in an industry where there's fewer upfront starting costs like asset purchases if you start your own business after being made redundant post-Covid19.

The proposal to increase the prov tax threshold to 25k is stupid. Already am seeing very small businesses who will struggle with the change to 5k. Basically means many small businesses will just be paying terminal tax only, and they are often the ones who struggle to keep money aside.

Just because your clients are struggling to pay their tax obligations is no reason to alter the tax system. Any SME who doesn't provision for tax probably shouldn't be in "business". It's a known impost, so if they don't provision for it they are either getting poor advice, no advance warning from their advisors, or are running unsustainable enterprises.

or are running unsustainable enterprises.

You just described the global economy.

Next....

pdk.You need to be a contributor to the economy before you claim the right to comment

Who made you the boss? Can you define a contributor to this economy...

Seems like these are reasonable premises. And they should apply to investment property also, you'd think.

Well I'm not in property but I'd think they do. I'm not sure how the properties are treated tax wise tbh, most business assets depreciate but houses aren't treated that way (you can't depreciate rentals) so to me it would seem you'd have to continue buying and mortgaging to defer any tax on the profits of a sale, said profits would be quite high possibly. Or once purchased you'd have to hold them. I don't know.

Was more the sentiment around that just because people haven't managed their cashflow or risk is no reason to completely change our financial system.

I'm not sure whether you're saying you agree or disagree. My position is that being self employed/ business owner is not for the ill informed or fiscally profligate. There is much risk involved.

Tax pooling used to be the go-to here - have prov tax changes meant this no longer works?

How about being able to carry losses backwards? That way, when times are hard you could get a refund of tax paid in the previous period. When things go sour it usually happens fast and every little helps. Our SMEs are a precious resource, they are where the employment of the future will come from.

That assumes they paid tax in the previous period. If they made a tax loss in the previous period they will have nothing to "carry back". Bottom line is, in the current situation many of the SMEs who are now struggling,and will go under, probably shouldn't have started out in the first place. It may be a harsh observation but the truly viable businesses will survive and come out of this stronger and more profitable. Those who jumped on the "bandwagon" will fail.

Have you ever actually run a small or medium sized business? Where is the empathy?

I run one now and have done for nearly 30 years. I've seen many people see the contract rates and think "wow that's twice what I earn" and then jump in poorly prepared and subsequently fail - usually because they didn't provision for terminal tax, spent the GST before it was due, and didn't have the ongoing cashflow to provision for Provisional Tax. They were good workers but poor Business owners - there's a huge difference.

Nothing to see here

Has advantages and disadvantages. We are entitled to our own opinion, but if the advantage out weighs the disadvantage part then why not try.

Days to the General Election: 21
See Party Policies here. Party Lists here.