Tax Simplification Proposals For Small Business
Government Consults On Tax Simplification Proposals For Small Businesses
The government has released a discussion document aimed at simplifying the tax system and helping reduce stress on small business.
More Time for Business was released today by Associate Revenue Minister Paul Swain and Under Secretary to the Minister of Revenue John Wright.
It sets out a wide range of proposals for reducing the stress, uncertainty and risks for small businesses in meeting their tax obligations.
"New Zealand is a country of small businesses. Over 95% of employers have fewer than 20 employees, while 84% have fewer than five employees. For this reason, high compliance costs are a serious concern to the government. Reducing these costs for small businesses will help them to increase their productivity and effectiveness.
"The overwhelming majority of small businesses pay their taxes but are concerned that if they make a mistake they will end up paying penalties and interest.
"The proposals being announced today are an attempt to lower their anxiety and make it easier for small to medium sized business to pay their taxes. We want business people to have more time for doing what they do best - running their businesses.
The main proposals
relating to small businesses are:
* Provisional tax:
Small businesses could pay provisional tax as income is
earned, rather than paying it in three equal payments
throughout the year. For some businesses this would result
in a better match of cash flow and tax payments. Other
proposals would reduce interest costs associated with the
current system for all businesses.
* Employers and PAYE:
Employers could reduce their exposure to penalties and
interest by using intermediaries such as payroll firms when
collecting and paying PAYE.
* End-of-year tax
adjustments: Requirements associated with end-of-year income
tax calculations for small businesses, such as trading stock
valuations, could be reduced.
* Simplifying
requirements: Other forms and processes could also be
simplified. They include exemption certificates for
non-resident contractors' withholding tax and the resident
withholding tax certificates sent out by financial
institutions.
* Benefiting from information technology:
Recent advances in information technology can help to reduce
tax compliance costs by reducing the need for businesses to
communicate with Inland Revenue, simplifying the calculation
and payment of tax, simplifying the filing of returns, and
improving the administration of the tax system.
"Other proposals include helping people who receive family assistance by reducing the number of forms involved, removing complex end-of-year adjustments, and reducing the risk of their owing family support at the end of the year.
"The discussion document builds on earlier tax simplifications that resulted in most salary and wage earners not having to file income tax returns from last year," Paul Swain and John Wright said.
"They include extending the number of individuals who do not have to file a tax return, and reducing risk and compliance costs for those who have small amounts of other income to declare.
"However there is a lot of work to do. Some of the complexity of tax law arises from the changes in the business and economic environment as well as changes to government policies, which has meant frequently updating the law to encompass a more complex set of circumstances.
"Reducing risk and compliance costs for business taxpayers is a challenging process because there is no single solution that will suit all businesses. To make the most of the opportunity presented by More Time for Business, we need feedback on the proposals from businesses, their tax advisers and other interested parties," Paul Swain and John Wright said.
The closing date for submissions is 15 June. More Time for Business is available at Bennetts Government Bookshops and at www.taxpolicy.ird.govt.nz and www.treasury.govt.nz
Ends
More Time for Business: Questions and Answers
The proposals in general
1. How
many businesses will these proposals help?
New Zealand is
a country of small businesses. Over 95% of employers have
fewer than 20 employees, while 84% have fewer than five
employees. In total there are around 450,000 small
businesses in New Zealand.
Businesses are very varied,
and some of the proposals will reduce costs for some
businesses but not for others, while other proposals will
help a different group of small businesses altogether. Some
of these proposals, like those aimed specifically at
reducing the impact of use-of-money interest on provisional
tax, will help medium and large businesses as well.
2.
What is a small business?
For the purposes of the
proposals, a small business is one whose total value of
taxable supplies for the last twelve months was $1.3 million
or less. Or whose total value of taxable supplies is not
likely to exceed $1.3 million in any period of twelve months
beginning on the first day of any month. This is the same
criterion used for determining which businesses may account
for GST on a payments (or cash) basis.
3. How are the
proposals in this document different from tax simplification
in the past?
Tax simplification work in the past has
focused on getting rid of unnecessary forms and encouraging
voluntary compliance without placing an excessive burden on
taxpayers, particularly if they are having difficulty
meeting their obligations. This document represents a shift
in focus towards reducing the risk of not complying in the
first place.
4. What else is the government doing to
reduce tax compliance costs?
We are concentrating on
increasing taxpayer certainty and making compliance as easy
as possible. Other projects to reduce compliance costs are
set out in chapter 2 of the document. It is a busy year for
tax simplification, with four other consultative documents
on different aspects of tax simplification planned for
release shortly.
5. What about the work of the Business
Compliance Cost Panel?
The government’s programme for
reducing the costs imposed by the tax system is part of our
business compliance cost reduction programme. Recent reviews
have identified the main areas of concerns and consultation
and work to develop solutions had already started because it
is a priority for us. We also see it as a process of
continuing improvement and any new concerns identified by
the Panel will be addressed as part of the government’s tax
simplification programme.
Withholding tax on business
income
6. What is the proposal?
The government is
proposing that, instead of a small business paying
provisional tax, it could deposit its income into a bank
account, from which the business’s bank would withhold a
percentage in lieu of the business’s income tax. The bank
would pay the tax regularly to Inland Revenue, perhaps on a
monthly basis.
7. Who would the proposal
affect?
It would be a voluntary option available to small
provisional taxpayers (those with an annual turnover of less
than $1.3 million). The proposal would also affect banks
who chose to participate and act as intermediaries.
8.
Why is the change needed?
The current provisional tax
payment system assumes a business has a regular income flow,
and a tax liability that can be divided evenly into three
equal payments during the year.
This causes problems for
businesses that do not have a regular income-flow throughout
the year, or who earn seasonal income. Their provisional
tax payments often do not match their income, so they can
experience cash-flow problems when it is time to pay their
provisional tax.
The withholding tax proposal would allow
these businesses to make tax payments that would mirror
their income, thereby assisting with their cash-flow.
9.
Would there be any other benefit for businesses choosing
this option?
Businesses that do not have a regular
income-flow throughout the year or who earn seasonal income
can have difficulty with estimating during the year how much
income they will have earned by the end of the year. This
sometimes means that they have to pay use-of-money interest.
Businesses who choose this option would no longer have to
pay use-of-money interest.
The proposal would also
ensure that businesses regularly put aside money to meet
their tax liabilities. This reduces the risk that they
might not be able to pay their tax on time, since tax would
be paid on each deposit as it is made.
Businesses would
also be able to pay their tax during the year without the
need to interact with Inland Revenue and the provisional tax
system. This would remove the risks of forgetting to make a
provisional tax payment and the need to contact Inland
Revenue three times a year.
10. Would all of a business’s
income have to go into the one bank account?
It might be
necessary for a business to establish a second bank account
into which capital payments could be deposited without being
subject to withholding tax. For example, if a business sold
a motor vehicle and intended to use the funds as a deposit
for a new vehicle, putting the proceeds from the sale into a
separate account would ensure the full sum was there for the
deposit. Some businesses may already have multiple accounts
that could serve this purpose.
11. Who would set the
withholding rate for the tax to be deducted?
Businesses
would nominate their own withholding tax rate, which would
be based on a ratio of their expected tax liability to their
deposits during the year. They would also be able to adjust
the nominated withholding rate if they thought it no longer
correct, in the same way that provisional tax can be
estimated.
12. Could a business get help from Inland
Revenue in setting its withholding rate?
As a starting
point for determining an appropriate rate for the year,
Inland Revenue could provide businesses with a ratio that
would have been correct for a previous year. It should then
be a simple matter for businesses or their tax agents to
work out their ratio for the current year.
13. How
careful should a business be in choosing the right
withholding rate?
The withholding rate selected by a
business would have to be reasonable, in the same way that
estimates of provisional tax payable must be reasonable.
14. What if a business fails to pay the right amount of
tax during the year because it chooses the wrong withholding
rate?
Any difference between the tax withheld during the
year and a business’s residual income tax (RIT) for that
year (basically the total annual tax to pay after
subtraction of rebates and tax credits) would be due at the
business’s terminal tax date.
If the tax withheld for the
year was less than, say, 80% of the year’s RIT, or if any
difference between total tax withheld for the year and the
year’s RIT was greater than $2,500, the business would be
returned to the provisional tax payment system for a period
of four years. This would also apply if the business’s
lowest elected percentage in the first half of the income
year was less than 75 percent of the ratio of its RIT to
total income.
15. What benefit would banks get from the
proposal?
Participation by banks would be commercially
attractive. They would benefit from retaining tax payments
for a period before they were paid to Inland Revenue. Their
customers would also benefit from the ability to
participate.
16. Would the government legislate for the
involvement of banks?
The government does not wish to
legislate for their involvement. It hopes they would become
involved because of the commercial benefits. It is also
important to remember that their role would be one of
supporting taxpayers in meeting their obligations, rather
than one of collecting tax on behalf of the government.
17. Who carries the risk of tax payments not being made
to Inland Revenue?
The government’s view is that, given
that the proposals are intended to reduce risk for
taxpayers, if a business has made a payment to its bank, it
has met its tax obligations. The government would address
risk issues in relation to banks when negotiating contracts
with them.
Payments based on GST returns
18. What is
the proposal?
The government is proposing that small
businesses that file GST on a one-monthly or two-monthly
basis could, instead of paying provisional tax, pay a
proportion of their GST sales and income along with their
GST as instalments of income tax.
19. Who would the
proposal affect?
The proposal would be a voluntary option
available to small provisional taxpayers (those with an
annual turnover of less than $1.3 million), who file their
GST returns once a month or every two months.
20. Why is
the change needed?
The current provisional tax payment
system assumes a business has a regular income flow, and a
tax liability that can be divided evenly into three equal
payments during the year.
This causes problems for
businesses that do not have a regular income-flow throughout
the year, or who earn seasonal income. Their provisional
tax payments often do not match their income, so they can
experience cash-flow problems when it is time to pay their
provisional tax.
The proposal would allow these
businesses to make tax payments that would more closely
reflect their income, thereby assisting with their
cash-flow. As GST sales and income increased, the amount of
income tax paid would also increase, while declines in sales
would result in less tax paid.
21. Would there be any
other benefit for businesses choosing this
option?
Businesses that do not have a regular income-flow
throughout the year or who earn seasonal income can have
difficulty with estimating during the year how much income
they will have earned by the end of the year. This
sometimes means that they have to pay use-of-money interest.
Businesses who choose this option would no longer have to
pay use-of-money interest.
The more frequent tax
payments would also result in smaller payments, reducing the
risk that a payment was too large to meet or that the tax
due had been spent by the business.
22. Who would set the
rate for the amount of tax to be paid?
A business would
set the amount of tax payable on each GST due date as a
percentage of its GST sales, and could vary it as it sees
fit.
23. Could a business get help from Inland Revenue
in setting its tax payment rate?
As a starting point for
determining an appropriate payment rate, Inland Revenue
could provide businesses with a guide ratio, although the
responsibility for working out an accurate ratio would
remain with the business.
24. How careful should a
business be in choosing the right tax payment rate?
The
tax payment rate selected by a business would have to be
reasonable, in the same way that estimates of provisional
tax payable must be reasonable.
25. What if a business
fails to pay the right amount of tax during the year because
it chooses the wrong tax payment rate?
Any difference
between the tax paid during the year and a business’s RIT
for that year (basically the total annual tax to pay after
subtraction of rebates and tax credits) would be due at the
business’s terminal tax date.
If the tax paid for the
year was less than, say, 80% of the year’s RIT, or if any
difference between total tax paid for the year and the
year’s RIT was greater than $2,500, the business would be
returned to the provisional tax payment system for a period
of four years. This would also apply if the business’s
lowest elected ratio in the first half of the income year
was less than 75 percent of the ratio of its RIT to total
income.
Pooling of provisional tax
26. What is the
proposal?
The government proposes that businesses be
allowed to pool their provisional tax payments with those of
other businesses, with the result that underpayments can be
offset by overpayments within the same pool. The
arrangement would need to be made through an intermediary,
who would also arrange for the businesses to be charged or
compensated for the offset.
27. Who would the proposal
affect?
Pooling of provisional tax would be a voluntary
option available to all provisional taxpayers.
28. Are
there any restrictions on participation by businesses?
In
order to match underpayments with overpayments, each pool
would be restricted to businesses with common due dates for
provisional tax. For administrative simplicity,
participants would need to be identified to Inland Revenue
before the due date of their first provisional tax payment,
and would have to participate in the arrangement for the
whole year. Transfers between pools would not be permitted,
but businesses could make payments to Inland Revenue in
addition to those made to the intermediary.
29. Why is
the change needed?
The difference between what some
businesses pay during the year as provisional tax and their
total income tax liability for the year attracts
use-of-money interest. About one in five provisional
taxpayers falls into this group.
Difficulties in
forecasting income mean that some taxpayers underestimate
their income and are charged use-of-money interest, whereas
others overestimate their income and are paid use-of-money
interest. The proposal is specifically designed to reduce
the impact of the use-of-money interest rules. Interest
paid to or paid by businesses participating in a pooling
arrangement would be more favourable than the use-of-money
interest rates applied by Inland Revenue.
30. Why is it
important that businesses be able to access more favourable
rates of interest?
Many business taxpayers feel that the
use-of-money interest rates applied by Inland Revenue do not
adequately compensate them if they overpay their tax, and
that they are over-charged if they underpay their tax.
31. Why doesn’t the government just change the
use-of-money interest rates?
The rates reflect the fact
that the government is an involuntary borrower if taxpayers
overpay and an involuntary lender if they underpay.
The
underpayment use-of-money interest rate is roughly
equivalent to the cost of unsecured bridging finance
borrowed by small firms. Lowering this rate would reduce
the incentives for taxpayers to pay tax on time, probably
resulting in smaller businesses not paying provisional tax
till the terminal tax date.
Increasing the overpayment
rate might result in some taxpayers overpaying tax simply to
have access to an interest rate better than that provided by
the private sector.
32. Are there any circumstances in
which use-of-money interest would still apply?
Inland
Revenue would still apply use-of-money interest if, after
the pool was divided and transferred to taxpayer accounts,
underpayments or overpayments remained. Interest on
underpayments or overpayments would be charged or paid
directly to the businesses concerned.
33. Would there be
any other benefit for participants?
The risk to
businesses of late payment penalties would be reduced, since
the obligation to make payment to Inland Revenue on the due
dates would be passed to intermediaries.
34. Who are the
intermediaries who would arrange the pooling and what role
would they play?
Intermediaries would be either financial
institutions, for example, banks, or tax agents.
Participation in a pool would be by arrangement between
businesses and intermediaries. Participating businesses
would make provisional tax payments during the year in the
same way as they do now, but to their intermediaries. The
intermediaries would send the pooled payments as one total
payment to Inland Revenue.
Once the participants’ tax
liability was determined at the end of the year, businesses
would know whether they had underpaid or overpaid their
provisional tax. At that stage the intermediaries would
offset underpayments against overpayments within each pool,
give instructions to Inland Revenue as to how the pool
should be divided between the participants, and charge or
compensate the participants for the offset.
35. How many
pools could one intermediary manage?
One intermediary
could coordinate multiple pools. Each pool would need to
contain a minimum number of participating businesses – at
least one hundred. Otherwise the costs associated with
running smaller pools would outweigh any benefits. There is
also a risk with small pools that there would be
insufficient underpayments and overpayments to provide any
real benefits to the participants.
36. What benefit would
intermediaries get from pooling
arrangements?
Participation by intermediaries would be
commercially attractive. Intermediaries would benefit from
retaining tax payments for a period before they were paid to
Inland Revenue. Intermediaries would also gain from the
opportunity to manage the arbitrage between those in a pool
who overpay and those who underpay. Their customers would
also benefit from the ability to participate.
37. Would
the government legislate for the involvement of
intermediaries?
The government does not wish to legislate
for their involvement. It hopes they would become involved
because of the commercial benefits. It is also important to
remember that their role would be one of supporting
taxpayers in meeting their obligations, rather than one of
collecting tax on behalf of the government.
38. Who
carries the risk of tax payments not being made to Inland
Revenue?
Intermediaries would inform Inland Revenue of
the payments they have received from their clients, and that
information would be available to the clients from Inland
Revenue. This means that clients could check the transfer
of payments by intermediaries. On this basis, the onus for
ensuring that tax payments have been made to Inland Revenue
would remain on the clients.
PAYE proposal
39. How will
this proposal help employers?
Any employer who uses a
recognised payroll firm to calculate and pay PAYE will to a
large extent not be exposed to penalties and interests if
the calculation is wrong or if the payment is late. Lots of
employers already use payroll firms to do this work but the
responsibility for the tax calculation and payment still
rests with employers. This proposal lets employers get on
with what they do best, running their businesses and moves
the responsibility for meeting PAYE obligations to experts
In particular, the PAYE rules can seem daunting for new
employers, and this proposal means that they don’t have to
spend time and resources to become experts at PAYE to employ
staff.
40. How many employers are there, and how many of
them are small employers?
In New Zealand there are about
160,000 employers and 95,000 of them employ five or fewer
staff.
This is an option. It is not compulsory, so we
don’t know how many of them will use this option. Some
employers are quite happy with what they do now.
41.
Will employers have to pay for this service?
Employers
who use payroll firms do pay for those services.
Technological changes in the industry and tools like the
internet have meant that those costs have reduced
significantly making them very cost effective.
Employers
have the use of the PAYE deductions until they are paid to
Inland Revenue. That can be up to 50 days for small
employers and 20 days for large employers, and there is an
option under this proposal to use that benefit to reduce the
costs of using a payroll firm.
42. What if employers
don’t want to give up the use of their PAYE
deductions?
There is an option under this proposal that
will help those employers reduce the risk of getting the
calculations wrong or paying their tax late.
43. What
makes the government think that payroll firms will
participate?
It’s a commercial opportunity for them,
expanding on the type of services that they currently
provide.
End of year adjustments
44. How many
businesses will benefit from the proposal not to value small
amounts of trading stock?
About 12,000 businesses make
tax calculations for small amounts of trading stock. There
are many more businesses who have very small amounts of
trading stock but fail to count it. This proposal will
reduce risk for those businesses too.
45. Why was a
$5,000 threshold chosen?
Like all tax thresholds, going
over this threshold would create some compliance costs.
Those costs, for example a sudden increase in tax liability
and moving away from accounting treatment, become more
significant with a larger threshold.
Increasing non-filing
and simplifying family assistance
46. How will these
proposals help businesses?
Some taxpayers who are
basically wage and salary earners are treated like
businesses because they may have income that does not have
tax withheld on it. The proposals extend non-filing to
these people reducing the risk of not complying with tax
requirements that are designed for
businesses.
Non-resident Contractors’ Withholding Tax
47. What is NRCWT?
Since 1982, contract payments
made to non-resident contractors have been subject to a 15%
withholding tax under the Income Tax (Withholding Payments)
Regulations 1979. This is known as non-resident
contractors’ withholding tax (NRCWT).
48. What are the
proposals?
The government proposes to simplify the NRCWT
rules by introducing an exemption for most short-term
contracts; and by not applying penalties in circumstances
when employers have exercised reasonable care, but have
still failed to comply with the rules.
49. Who would
the proposals affect?
Non-resident contractors and their
New Zealand employers.
50. Why are the changes
needed?
Currently, if non-resident contractors wish to be
exempt from the NRCWT rules they, or New Zealand employers
on their behalf, must apply to Inland Revenue for a
certificate of exemption. The government is concerned that
the process for applying for exemptions may create
unnecessary compliance costs in cases where it is later
confirmed by Inland Revenue that no tax liability existed in
the first place.
The government is also concerned that
employers are required to withhold NRCWT regardless of
whether non-resident contractors have a New Zealand tax
liability, and are exposed to penalties if they do
not.
51. How would the exemption for short-term
contracts work?
The government proposes to remove the
need to apply for exemptions for non-resident contractors
from countries with whom New Zealand has a double tax
agreement (agreements between countries to prevent taxpayers
being taxed in both countries on the same income) if they
are present in New Zealand for less than 62 days.
Short-term contract activities are usually exempt from
tax in New Zealand under our double tax agreements, so the
requirement that certificates of exemption be obtained in
relation to such activities normally has little
benefit.
52. How would the proposal concerning penalties
apply?
Although a non-resident contractor may not
initially have a New Zealand tax liability, subsequent
events might result in a liability arising. This can occur,
for instance, when the non-resident is present in New
Zealand for a longer period of time than initially expected,
or if he or she creates a permanent establishment in New
Zealand. In these cases, employers who do not withhold
NRCWT from the beginning of the contract will face
penalties. The result is that employers genuinely
endeavouring to comply with the law could be
penalised.
The government proposes to prevent penalties
from applying if employers exercise reasonable care in
determining that non-resident contractors initially do not
have a New Zealand tax liability, and it later transpires
(through an unforeseen circumstance) that NRCWT should have
been deducted.
53. Would these employers be required to
make catch-up payments for the NRCWT that should have been
deducted?
The employers would be required to make
catch-up payments, and to do so within, say, 30 days of the
change in circumstances that caused the NRCWT liability to
arise. Use-of-money interest would still apply from the
original due date.
54. The discussion document also says
that the government is considering employer assessment of
NRCWT. How would this work in practice?
The exact form
of this proposal is still under consideration. Nonetheless,
it centres around employers determining themselves whether
NRCWT should be deducted from contract payments made to
non-resident contractors. The employers would be required
to take reasonable care in making this determination,
otherwise they would face potential penalties. It is likely
that the employers would be required to send some
information to Inland Revenue, advising the department of
their decision to withhold or not, as the case may be, and
providing a copy of the relevant contracts.
Resident
Withholding Tax certificates
55. What are the
proposals?
Banks, financial institutions and other payers
of interest are required to give resident withholding tax
(RWT) information in the form of a certificate to earners of
interest. The government proposes to change the legislative
requirements on how the information in the certificates can
be communicated, to keep up to date with technological
changes in the banking industry.
The government also
proposes to increase the threshold under which interest
payers do not automatically send RWT deduction certificates
to savers, from $20 to $50.
56. Who would the proposals
affect?
All interest payers, for example, banks and
financial institutions, and interest earners.
57. Why
are the changes needed?
In order to reduce their
compliance costs, interest payers need to be able to take
advantage of new opportunities provided by technology for
the communication of information. Interest earners may also
wish to utilise these opportunities, for example, by way of
internet banking.
Increasing the threshold under which
interest payers do not automatically send RWT deduction
certificates to savers will also reduce compliance
costs.
58. Would interest earners still receive
information about RWT deducted from their
savings?
Neither the type of information provided to
interest earners, nor the time by which it must be provided,
would change.
59. In what new ways might interest
earners receive RWT information?
New ways of receiving
RWT information could include by way of bank statement, by
e-mail or fax, or on bank web sites.
60. Would earners
of less than $50 interest still be able to receive RWT
information?
Earners of interest of less than $50 would
still be eligible to receive their RWT information, if they
requested it.
Imputation Credit Accountant refunds
61.
What is the proposal?
Companies applying for a refund of
imputation credit account (ICA) credits are sometimes
required to file what is known as an interim IR4J return,
despite having earlier provided the necessary information.
The government proposes that the requirement for providing
the interim IR4J return be removed, thereby making the
refund process faster and less costly.
62. Who would
the proposal affect?
All businesses who maintain an ICA,
who may find themselves required to file an interim IR4J
return before they can receive a refund.
63. What is the
intended purpose of the interim IR4J return?
Companies
must file an imputation return at the end of the year,
either on an IR4J return form or as part of a company income
tax return form (IR4). Even so, despite having already
filed an IR4J or IR4, if a company applies for a refund and
Inland Revenue has not processed the return form, the
company must also file another, interim, IR4J return. This
is to prevent refunds exceeding the credit balance in the
ICA as at the previous 31 March.
64. Won’t removal of the
requirement to file the interim IR4J return put company tax
revenue at risk?
The requirement to file an interim
return creates unnecessary compliance costs. ICAs with a
debit balance attract a penalty of 10% of the debit. This
penalty is sufficient discouragement to prevent companies
applying for refunds in excess of their balance.
65. Why
couldn’t the Commissioner just use his discretion to waive
the requirement for the interim IR4J return to be filed?
The legislation requiring the filing of the interim IR4J
is clear and unambiguous. Removal of the requirement to
file must be done by way of legislative amendment.