“This year’s Budget will be delivered against a backdrop of a growing economy, supported by strong levels of tourism and migration, a large pipeline of construction projects and low interest rates.”
This was how Prime Minister John Key opened a recent address at a Business New Zealand event – and the news was good for small to medium enterprises with the Prime Minister outlining three significant tax-related initiatives, as follows.
- Eliminate or reduce use-of-money interest for the vast majority of taxpayers.
- Give small businesses with a turnover of less than $5 million the opportunity to choose a new “pay-as-you-go” option for provisional tax.
The way provisional tax currently works is that people, by one method or another, estimate their likely tax bill for the coming year and pay that amount in three instalments. The new option announced by the Prime Minister drops the estimation part and instead works out your tax payments on an ongoing basis throughout the year via the business’ accounting software package.
Businesses will be prompted to make the right tax payment directly through their accounting system, and generally at the same time as you pay GST.
Use-of-money interest won’t apply to taxpayers who choose this method and who pay their tax on time.
The Prime Minister estimated that 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.
Contractors to choose a withholding rate
- From 1 April 2017 contractors can choose their own taxation withholding rate
- Subject to minimum 10% withholding
- Withholding tax rules extended to contractors engaged through labour hire firms.
Currently, payments to around 130,000 contractors each year have withholding tax deducted from them and this withholding tax is deducted at a prescribed rate per industry.
“Many of you will have seen the form that says if you are a shearer you’ll have payments withheld at 15 per cent, if you’re a freelance journalist they’re withheld at 25 per cent, cleaning contractors at 20 per cent, and so on down the list,” said the Prime Minister.
“You may well have scratched your head at these differences.”
The system is to become more flexible from 1 April 2017, and after applying a minimum 10% withholding rate, contractors will be able to choose their own withholding rate beyond that.
Contractors who aren’t currently subject to withholding tax rules will also be able to elect into this system, with the payer’s agreement.
Late payment penalties
- For new debts after 1 April 2017, the 1 per cent ongoing monthly penalty will 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.
The Prime Minster acknowledged that the current penalty system is inefficient, with a large portion of penalties uncollectable and simply written off.
“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,” said the Prime Minister.
“The Government encourages compliance and wants to give taxpayers more opportunity to talk to Inland Revenue and work out a way to repay their tax debts before they become too big to resolve.”
The Taxpayers’ Union is welcomed the Government’s SME-friendly tax package today by the Prime Minister.
“The proposals offer commonsense modernisation of the tax system and the way small businesses interact with the IRD. We welcome the announcement,” said Jordan Williams, Executive Director of the Taxpayers’ Union.
BusinessNZ was also supportive, with BusinessNZ Chief Executive Kirk Hope saying the changes were incremental, and spread across a number of tax areas, and should be particularly helpful to small business.
“The changes to provisional tax will help increase certainty for business planning. The changes will also boost businesses’ ability to interact on-line with the IRD,” he said.
“The adjustment towards more transparency in reporting and sharing information will be welcome as part of an overall focus on transparency.”
Leading credit data bureau and collections agency, Dun & Bradstreet, welcomes the increased transparency.
“It is absolutely in everyone’s interest to see where risk lies in the business community so that New Zealand companies are equipped with appropriate information to make the best commercial decisions,” said Simon Bligh, CEO of Dun & Bradstreet in Australia and New Zealand.
“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.
“While there are important privacy issues to consider, we see the proposals as an appropriate and much needed balancing of public interest versus privacy. These changes will ensure that organisations that pay their fair share of tax are not in placed at a disadvantage, through a lack of transparency, against those that don’t,” said Mr Bligh.
Perhaps not surprisingly, Xero was very enthusiastic about the announced changes, calling it the most significant change to the New Zealand tax system in years.
“This is huge for small businesses as Provisional Tax is the bane of small business owners’ lives,” said Rod Drury, CEO at Xero.
“Previously they had to guess how much money their business might make in the future and forward pay this tax.”
The announcement boosted the share price of accounting software businesses, with Xero shares rising 2.3% to $17.09, their highest level in more than two months. MYOB hailed the changes as a “game changer for small businesses”.