By Bernard Hickey
Prime Minister John Key has used a pre-Budget speech today to announce a range of tweaks to provisional tax and late payment penalties for small to medium sized businesses (SMEs) that would cost a net NZ$187 million over four years.
"I want to announce today is a new SME-friendly tax package that I think will be welcomed by all businesses, and especially by smaller ones," said in speech to a Business NZ luncheon in Wellington.
"The package will make paying tax easier and more certain, reduce the burden of interest and penalties, and help smaller businesses tailor payments to their own circumstances," he said.
Key said businesses had told the Government that "provisional tax is hard to get right and expensive to get wrong."
"Perfect accuracy can sometimes be costly in a way that doesn't seem justified. And some penalties are seen as punitive and discourage compliance," he said.
There are three parts to the package.
Provisional tax changes
The first relates to provisional tax, with the Government planning to eliminate or reduce use-of-money interest for the vast majority of taxpayers.
Those businesses with turnover of less than NZ$5 million will be able to choose a new 'pay as you go' method for paying provisional tax from April 1, 2018, once IRD has its new computer system up and running.
Currently, businesses pay provisional tax by estimating their likely tax bill and paying that amount in three installments.
"This new option drops the estimation part and instead works out your tax payments on an ongoing basis throughout the year," Key said.
He said every two months the businesses' accounting software package would calculate taxable income for that period.
"You'll be prompted to make the right tax payment directly through your accounting system, and generally at the same time as you pay GST," Key said.
"Under this new "accounting income method", provisional tax payments will more accurately match income as it is earned, be made more regularly and be integrated into normal business practices."
Key said use-of-money interest won't apply to taxpayers who choose this 'pay as you go' method and who paid their tax on time. IRD expected the proportion of small businesses using cloud-based accounting software such as Xero or MYOB was expected to growth from 30-40% to 85-90% over the next 10 years.
Key said up to 110,000 small businesses could be eligible to use the accounting income method, starting from 1 April 2018 when Inland Revenue's new computer system is up and running.
Use of money interest changes
Key said the Government wanted to get a lot more businesses out of having to use the 'use of money' regime. This is where businesses have a tax liability between their provisional payment and their actual liability, which was only known at the end of the year.
"We want to get a lot more businesses out of the use-of-money regime because interest charges are often burdensome and frustrating for taxpayers who are simply following the rules. The accounting income method will help do that for many small businesses," he said.
"In addition, taxpayers who continue to use what is currently the most common method for calculating provisional tax - the standard or "uplift" method - won't be subject to use-of-money interest if their tax liability for the year is under NZ$60,000 and their tax is paid on time," he said.
Key said this would include companies as well as individuals and would take up to 67,000 taxpayers out of the 'use-of-money' regime.
Taxpayers with a liability above NZ$60,000 and who used the 'uplift' method would only have to pay use-of-money interest from the last instalment of provisional tax, which would affect a further 19,000 taxpayers.
"The combination of all these changes means that the vast majority of taxpayers either won't pay use-of-money interest or will pay significantly less than they do now," Key said.
Contractors can choose with-holding rate
Key said contractors would also be given the flexibility from April 1, 2017 to choose a withholding rate to suit their individual circumstances, given 130,000 contractors each year had withholding tax deducted at varying rates from 15% to 25%, depending on their profession.
"This means contractors can take into account their individual circumstances, which of course they know better than anyone else. If an accurate rate is chosen, contractors may no longer be forced into an "over-withholding" situation or an "under-withholding" situation that could see them liable for provisional tax," Key said.
Withholding tax rules would also be extended to contractors engaged through labour hire firms.
Late payment penalties
The third tweak in the package is around late payment penalties. From April 1, 2017 the 1% ongoing monthly penalty would be scrapped for income tax, GST and some other payments.
"The immediate penalty that applies to late payments, and the 4 per cent penalty after a further week, will remain. So will use-of-money interest on overdue tax," he said.
"But a 1 per cent monthly penalty on top of all this, as we have at the moment, makes the combination of penalties and interest very burdensome. We need to be realistic. Building up a very large debt to Inland Revenue is often an ineffective way to get individuals and businesses to resolve their tax situation," he said, adding that a large portion of the penalties were uncollectible and written off.
IRD released the full detail of the proposals in this business tax issues paper.
Tax debt info sharing questioned
Accountants and tax experts broadly welcome the changes.
Chartered Accountants Australia and New Zealand (CA ANZ) Tax Leader Peter Vial would generally benefit businesses by reducing compliance costs.
However, Vial said a proposal to allow Inland Revenue to share tax debt detail with credit reporting agencies, which was not mentioned in the speech, was quite a fundamental shift.
“The new rules will need to be robust and administered fairly," Vial said.
IRD will also share information with the Companies Office for serious offences.
Ernst and Young Executive Director for Tax David Snell described the package as the "first concrete fruit of Inland Revenue’s business transformation project" and the biggest shake-up in provisional tax in 20 years.
Snell said the new accounting income method (AIM) whereby the amounts would be generated automatically by the cloud computing provider for six payments per year were technologically revolutionary.
"Some small businesses may appreciate AIM but it will put pressure on the accuracy of information within accounting systems," Snell said.
"Cash-flow implications of monthly/two-monthly tax payments may be challenging. In previous opinion surveys, businesses have been resistant to more frequently tax payments. Many advisors could also take the view that coding errors will lead to incorrect payment," he said.
"Extending the withholding tax net to labour-hire arrangements does mean that many taxpayers will pay tax earlier and it will reduce the advantages of incorporation."
Snell also questioned the move to share information with credit reporting agencies and the Companies Office.
"The tide is clearly going out for tax secrecy, with the government seeing Inland Revenue information as a significant asset to be exploited," Snell said.
"In this case, tax debt will be more transparent and creditors able to make better decision about trading with tax-indebted business. There must, however, be a risk that Inland Revenue will get something wrong, potentially harming the affected business: its systems are not perfect," he said.
Dun and Bradstreet welcomed the move to share tax debt information with the credit reporting agencies.
"Tax is essentially no different to any other form of credit risk, and we congratulate the New Zealand Government and the IRD on acknowledging this and kicking off this important initiative," said Simon Bligh, CEO of Dun & Bradstreet in Australia and New Zealand.
(Updated with reaction, detail)