Making Tax Simpler

On Wednesday the Prime Minister announced a welcome suite of proposals to reduce compliance costs and simplify tax for small businesses. Most of these changes will come in on 1 April 2017. 

The headline grabber has been the changes to the provisional tax system. This will involve increasing the limit at which use of money interest will become payable on unpaid tax form $50,000 to $60,000 and to extend these rules from just individuals to trusts and companies. In addition, from 1 April 2018, some businesses with will be able to pay provisional tax on a “pay-as-you-go” type system, called the Accounting Income Method. This will allow them to pay provisional tax at the same time as GST via accounting software and to base this payment on their accounting profits for the period. It will be interesting to see how this works and whether, in fact, it generates more compliance costs for small business in trying to get payments right each month rather than 3 times a year. 

The final change for provisional tax is to allow a company to make payments on behalf of shareholder-employees and pass this tax out as a credit to the shareholders when the year end salary is allocated. 

Another positive change is the significant reduction in late payment penalties. The current 1% per month incremental late payment penalties means debt owed to IRD escalates at an alarming rate for many taxpayers and can quickly become overwhelming (aggregate of interest and penalties being 27% in the first year). Under the new rules income tax, GST and Working for Families debt will only see the initial 1% and 4% penalties charged. This will only apply to new debt, but coupled with the provisional tax changes should see a real benefit for taxpayers. 

In line with a self-assessment tax regime, new rules will allow contractors to elect their own withholding tax rates which more accurately reflect their anticipated tax liabilities. It is proposed that this will apply to contractors and labour hire firms as well as non-resident entertainers. 

There are a number of small changes to “make tax simpler”. In particular allowing SME’s to not pay FBT on cars provided to shareholder employees, moving to a “standard rate” deduction for use of home office or business use of a private car, and increasing the threshold to correct minor errors in returns from $500 to $1,000. 

These announcements are hugely positive and practical for small businesses, and do show that the people at the top are listening to the feedback from those on the ground. We look forward to seeing draft legislation in due course. The full proposals can be found on the Tax Policy website and are well worth a read.