We are pleased to hear that the ACC Board have recommended reducing ACC levies for next year (2016/2017), NZ Gazette No 130 2 December 2015.  Unfortunately, it is still not fit for purpose for SME's.

First the good news, the ACC Board have recommended changes including:

  • Cover for work injuries paid by self-employed people and employers down to $0.80 (currently $0.90)
  • Cover for non-work injuries paid by employees  and by self-employed people down to $1.21 (currently $1.26)
  • Cover for motor vehicle injuries (levied through licensing fees and petrol levy) down to $130.26 (currently  $194.25)
  • updating the minimum and maximum liable earnings limits in line with inflation

Great to see these changes.  But what we also need to see is fundamental changes in the way levies are set for SME's and having them reconcile with the way income tax is charged.

For example, a SME company can elect to pay its shareholder-employees under the PAYE system, which will also be the sum used to calculate ACC.  But the company can alternatively elect to allocate the shareholders a salary (no PAYE) when the profit of the company is known, and in the interim pay "drawings" in anticipate of a future salary.  The first option gives security to the shareholder that their income tax has been sorted, and provides ACC cover immediately they are "employed".  The second option allows the company to determine the salary when the money is in the bank and the profit known.  It is a sensible decision to delay paying a salary until you know if the company has a profit on which to pay it.  Many companies take the middle option of a low PAYE salary during the year with a top up no-PAYE salary after year end.  The Income Tax Act is specifically drafted to allow this third option.

The problem with the second option, from an ACC perspective, is that shareholder has in effect no ACC cover until they have filed their income tax return and determine what their salary was for the year.  [Just to be clear, they have "cover", but with no evidence of income level, and no premiums are paid until the following year, so more like a Clayton policy] This is very difficult in the first year of a start up company, because there is no history to show what the salary would be.  In later years it is still a problem because of the fluctuating nature of shareholder salaries (based on company profit). 

ACC offer an option for shareholder employees to elect to have fixed cover, regardless of the actual salary (essentially an income protection insurance) - CoverPlus Extra.  Before this was introduced I would always recommend to clients that they take out private accident cover for a minimum of 2 years before ACC kicked in.  At first glance CoverPlus Extra is a good option, because the shareholder employee salary will vary from year to year depending on profit, capital and cashflow needs of the business.  But it is not so great to find this is not available if the shareholder takes a PAYE salary (or a mixture of PAYE and non-PAYE salaries).  ACC have told us that it is one or the other, no middle option!  If the Inland Revenue allow a middle option, then why can't ACC?

We have an example where a shareholder employee has elected the CoverPlus Extra option (simply to ensure they have ACC cover NOW).  But the ACC are so busy that the action time to issue the cover, assuming it will be accepted, will be 3 to 4 months (that is not a misprint).  If you or I applied for an insurance policy with a private provider, I'm pretty sure that they would have our policy signed up and premiums being paid long before that!  ACC say that you are covered from the date of application, but still it leaves us and our client uncomfortable.

I'm not bagging ACC, their staff do a great job and have always been exceptional in their dealings with me and my clients.  If I'm bagging anything, it is that the system is archaic, and not fit for purpose when it comes to SME's.  What we would like is to see CoverPlus Extra reviewed, to make it an attractive option which works in with the income tax system.

Disclaimer
The comments in this paper are the personal opinion of the writer and are not necessarily the opinions of Shellock Consulting Ltd.