Government to make tax easier for small businesses
As part of Inland Revenue’s transformation programme, the Government has announced proposed changes to provisional tax and withholding tax, along with other minor changes which promise to simplify tax for small to medium business. A detailed Issues Paper has been released by Inland Revenue and an online forum has been provided to allow taxpayers to discuss the proposals. The detailed Issues Paper is located here.
The key proposals are:
The biggest changes will be to provisional tax. Business has always had problems with provisional tax, and there has been a prevailing mood that provisional tax penalises business, especially when they unintentionally get it wrong. Major changes include:
- Reducing the number of situations where use of money interest (UOMI) applies. Taxpayers with residual income tax (RIT) of $60,000 or less will not be subject to UOMI provided they have made payments under the standard uplift method. For taxpayers with RIT of more than $60,000, UOMI will only apply following the third instalment of provisional tax provided they have made payments under the standard uplift method.
- Requiring related parties to use the same method of calculating provisional tax within an income year. This will primarily apply to groups of companies as well as companies and their shareholder-employees who do not have PAYE deducted.
- Implementing a specific anti-avoidance rule to prevent income shifting between related entities to manipulate obligations under the provisional tax rules.
- Introducing a new Accounting Income Method to calculate provisional tax. The Accounting Income Method will allow taxpayers with a turnover of less than $5 million to use their accounting results to calculate and pay their provisional tax at the same time as their GST payments.
Several changes are proposed in relation to withholding tax. These changes include:
- Allowing contractors to select their own rate of withholding tax to better match their expected tax charge for the year. This would be subject to a 10% minimum withholding tax rate. Default rates will apply if no rate is selected.
- Extending withholding tax to all labour-hire contractors (not just specific industries such as building work) including, for example, IT contractors and contract accountants. The withholding obligation falls to the company paying an individual.
- Non-resident contractors would continue to have a minimum rate of 15%.
- The non-deduction rate will be 45%.
- Allowing contractors not subject to withholding to voluntarily have tax withheld. The consent of both the contractor and the payer will be needed.
Minor changes are also proposed in a variety of areas. These changes include:
- Removal of the monthly 1% late payment penalty on overdue income tax, GST and Working for Families Tax Credit overpayment debt. The current initial 1% and 4% late payment penalties will remain. This is expected to reduce the effective rate of penalties and interest from 27% per annum to approximately 15% per annum in the first year.
- Permitting Inland Revenue to disclose serious tax debts to credit reporting agencies. Serious tax debts will be defined as either being overdue by a certain period of months, or new debt that is greater than a certain threshold.
- Permitting Inland Revenue to share information with the Companies Office where there is reasonable suspicion that a serious offence has been, is being, or will be committed, where the information will prevent, detect or provide evidence of this, and where the information is readily available, is reasonable and practicable and where communication is in the public interest.
- Permitting close companies to make a private use adjustment for motor vehicles that are used for both business and private purposes instead of subjecting them to the FBT regime.
- Increasing the threshold for the self-correction of minor errors from $500 to $1,000.
- Removing the 5,000 kilometre limit for use of the Inland Revenue mileage rate by self-employed persons.
- Inland Revenue setting on optional per square metre rate for the business use of home premises, covering utilities and other costs with the exception of mortgage interest, council rates and rent which will continue to be apportioned based on actual expenditure.
- Removing the requirement for a 63 day adjustment on employment accruals to be made, and instead permitting taxpayers to claim a deduction for the total employment accruals in the following year.
Submissions and Implementation
Submissions on the Issues Paper and the ability to post to the online forum close on 30 May 2016. Any legislation is expected to be introduced by August, with most measures implemented on 1 April 2017, with the exception of the Accounting Income Method, which will be implemented on 1 April 2018.
Staples Rodway View
In our opinion, the proposals contained in the government’s announcement are good for business and will make it easier for them to focus on improving their business instead of worrying about smaller tax issues.
We have long held the view that the current UOMI rules are unfair to business; expecting a business to accurately anticipate their taxable income prior to the end of the year is unrealistic and the rates imposed on underpayments are punitive.
Changes to the existing withholding tax rules are generally welcome, but the extension to all labour-only contractors will push an additional compliance burden back onto businesses. Details of how these changes will work with the current shareholder salary rules are also lacking.
Ultimately, the detail of any legislative change will be key and we look forward to the draft bills encompassing these proposals.