Last year we noted that the Government made significant announcements on tax a few days before the Budget. This year they are 6 weeks early! But never mind – it’s the thought that counts.

Today the Prime Minister, John Key, has announced sweeping tax changes entitled “Making Tax Simpler”. Let’s hope that comes true. So what is in the offering?

Provisional tax

The big bad tax that many taxpayers struggle with the concept and still end up with the risk of underpaying and being subject to penalties and interest. Provisional tax is at its worst in year two of any start up business, which is when tax is payable for the year just gone plus the current year. What’s proposed here?

  • Increase the ‘safe harbour’ of $50,000 residual tax to $60,000, and extending this to non-residents – the effect will reduce the number of taxpayers liable for interest penalty changes. It is said this will favourably affect 67,000 provisional taxpayers
  • Removing interest liabilities against the first two provisional tax instalments, provided the taxpayer pays on the uplift (standard) basis. This will benefit 19,000 taxpayers
  • Allowing businesses to pay their provisional tax through an Accounting Income Method – meaning provisional tax will be calculated on a real time basis of profits during the year rather than the existing method of paying tax based on the previous year’s performance. This is estimated to apply to 110,000 small businesses where their turnover is below $5 million
  • Allowing companies to pay tax on behalf of shareholders – eliminating them from the provisional tax regime altogether

Contractor and Withholding Tax

One of the biggest issues contractors have in New Zealand is managing their tax affairs (or to put it another way, putting aside the right amount of tax to pay, and not spending it). While we have Withholding Tax (Schedular payments) on some occupations such as labour only contractors in the building industry, many contractors are not covered. And for those that are subject to withholding tax the rate is often at odds with their real tax rate.

  • Contractors will be able to elect their own withholding tax rate, but with a minimum rate prescribed
  • Contractors will be able to elect into withholding tax

This will affect 130,000 business and should address concerns about the existing scheme.

Reducing late payment and incremental tax

One of the biggest complaints against the “unfairness” of tax is the onerous penalty rates charged to late payers (which is 5% if 5 days late, then 1% per month accumulating after that, plus interest). Some have even compared the Inland Revenue of being equal to loan sharks in their penalty rates.

  • Ceasing charging of incremental penalties on late payment of GST, provisional tax, income tax and Working for Families Tax credits – affecting some 132,000 income tax and GST payers and 23,000 families

The Government estimates this will be $260 million not charged over the coming 4 years, although because most is remitted anyway the real cost is ‘only’ $87 million.

Other Simplification measures

  • Simplifying FBT for “close companies”
  • Increasing the entitlement to file annual FBT returns by $500,000 to $1 million of PAYE/ESCT
  • Simplifying calculations for mixed business and private use of vehicles and home office
  • Allowing Resident Withholding Tax exemption certificates to rollover rather than expiring at year end
  • Modifying the ‘63 day rule’ on post balance date employee expenditure by making it optional
  • Doubling the self-correction of errors to a net $1,000 tax effect– still relatively low

Note: not all these changes will benefit taxpayers, the focus is on ‘simplification’.

Wider sharing of tax information

Interesting that this should feature, as it is not a ‘taxpayer friendly’ change. But we could be generous and say it is a ‘taxpayer saving’ feature, or a manner in which the Inland Revenue can share information on tax defaulters with credit reporting agencies and the Companies Office on companies and directors committing “serious offences”.

  • A credit check will now reveal tax debts – providing potential suppliers with more accurate credit worthiness information
  • The Companies Office will have access to better and faster information on tax defaulters – presumably on the basis that where a company and its directors may be in breach of their obligations under the Companies Act, or where there are banned directors in business

Most of these changes will not come into effect until 1 April 2018, whereas scraping the 1% penalty will take effect a year earlier. Some of these changes will come in progressively, but nevertheless most of these changes will be welcomed by the business community. We all are prepared to pay our fair share of tax, but we don’t want to have to spend a considerable amount of time working out what that tax is, and we don’t want to face penalties because our income changes from year to year.

So overall, we welcome the changes. Although we would like to see the definition of “close company” expanded to allow for trustee ownership.

If you want to read more, the 87 page Officials Issues Paper can be found here. You are welcome to make submissions on these changes, due date 30th May 2016. Want to know more about how this could affect you, then contact us.