SME Taxation
The NZ Institute of Chartered Accountants (and Tax Mgmt NZ Ltd) has produced a report recommending a major simplification of taxation for micro and small businesses.
Their goal is for a small business to only have to spend one hour a month filing a single tax return.
For micro-businesses (defined as earning under $60,000 with no employees except owner), they propose that they simply pay 15% of their turnover as taxation (incl ACC levies). This means no having to work out exact expenses (estimated to be 50% of turnover). It will also make it easier to collect tax on cash income.
The tax would be payable to IRD at least annually but more often if desired. An option to would be to designate to a bank your work account and have the bank automatically transfer 15% of all deposits to the IRD so you can’t spend it and get into arrears.
A small business is defined as turnover less than $1.2 million, registered for GST. Their proposal is to eliminate the need to monitor dividends and salaries to owners, and an imputation credit account. The business simply pays income tax alongside GST at the rate the owners are liable for.
Also no provisional tax, FBT or entertainment tax, and trading stock is dealth with on a cash basis, so no stocktakes.
These changes could affect many businesses. 90% have less than five employees and two thirds of those are run by owner operators.
NZICA make the point that the corner dairy faces the same rules as the largest corporates. Some will argue that is a good thing, but the compliance costs are considerable.
They propose both models be opt-in, so businesses could continue with the status quo if they wanted to.
You can provide feedback at www.smetax.co.nz.
I like the micro-business proposal especially. It really would only apply to people starting their business up, but that is when you want things to be simple.
I see some merits in the small business proposal, but not sure it reduces complexity as much as desired.
October 15th, 2009 at 12:21 pm
The small business changes confuse me a little.
You can already pay your income tax against gst using the ratio option. So, is this just an extension to that?
And, how does depreciation work? You still need some annual adjustments. I’d hate to calculate depreciation on each gst return.
The small business option saves me no time.
I think, the micro business option should be extended to businesses earning less than 500k per year.
October 15th, 2009 at 12:31 pm
I could write pages on this but consider a few problems.
How will the intricacies of Market Value, National Standard Costs Determination Order and the Herd Scheme affect the farmers who elect to use this system?
They quote the example of Burt the plumber. How will Burt’s liability for student loan payments be determined? And his liability for Child Support and his Working For Families income abatement? And his liability for previously overpaid social welfare benefits. How will we calculate Burt’s KiwiSaver contributions and the one for one subsidy. Burt’s company also has a 100 shares in Oil Search, an Aussie company. Will the company be subject to Foreign Dividend Withholding Tax on the dividends received and/or will that Fair Dividend Rate nightmare rear its ugly head. Burt’s Dutch missus has half the shares in the company and she still has a Dutch whole of life policy. I smell Foreign Investment Fund rules that are too tough for me to comprehend.
Let’s face it; tax simplification is the ultimate oxymoron.
October 15th, 2009 at 12:39 pm
Utterly brilliant idea. A few lessons in there for other government departments dealing with owner operators. A few bosses I’ve known were pretty fed up with the Dept of Statistics questionnaires. Just because it’s necessary, it doesn’t have to be onerous.
October 15th, 2009 at 12:51 pm
My initial reaction to the micro business idea was: this is brilliant. I have just consulted with a friend who is a microbusiness owner and she loves the idea too.
October 15th, 2009 at 1:43 pm
About time this was looked at, anything that reduces the amount of time spent on basically irrelevant paperwork has got to be good.
October 15th, 2009 at 2:00 pm
It is good to see a professional organisation placing the interests of their clients above their own. I expect that simplification of the Tax System will ultimately reduce the amount I pay an accountant to deal with the IRD on my behalf. An old client told me that he reckoned government both local and central had an “avoid simplicity at all costs” policy; currently the available evidence appears to support his theory.
October 15th, 2009 at 2:09 pm
Its all good, except there will be funny little things. For example a micro business is expecting be as such but has an unforeseen growth burst, just falling into a small business catergory. Their records may be insufficient (due to reliance on the micro business regime) to cope with this.
Also there of course would be addional anti avoidance provisions, otherwise one could structure their businesses so they all earned beneith $60,000 or alternatively could structure it in such a way that all profits went into the micro company, gettinge effectively a 15% tax rate, but with all costs being offset against income in the other company.
Also with it being a final tax, I guess there would need to be discompensation to the owners for dividends, i.e. they not been seen as income. Otherwise double tax would happen.
All quite interesting but as always the devil is in the detail.
October 15th, 2009 at 2:21 pm
Before I read and posted on this thread I did not know what an SME (Small and Medium Enterprise) was, now thanks to Wikipedia I find that I am one. If the downturn in work continues I may also become a micro-business?
October 15th, 2009 at 5:45 pm
Hmm… if it’s opt-in, then they will need to look at how long micro-business opt-in for. If it’s done on an annual basis, some (many? all?) micro businesses will still complete tax accounts, but then look at how much tax they will pay under the standard model, and how much tax they will pay under the turnover-ratio model, and choose whichever one is less. So they will still do all the work, and it just becomes a tax cut in disguise.
October 16th, 2009 at 8:48 pm
I’m surprised there hasn’t been more comment on this issue. IMO this is the single best chance for us to create meaningful growth and have any chance of catching Australia in economic terms.
There will need to be some strong disincentives to rort the system as i can see “Joe” the part-time property investor buying a house through an LAQC, declaring himself a “small business owner” and lopping even more of the tax tree while producing nothing of substance for the country.
I like the idea that the 15% threshold is extended up to $500k of sales, though this may be too ambitious. To be fair, $500k is still a bit in this country, i think it would probably be better at $250k, rising over time as the economy expands as a result of this forward thinking.
What governments and their advisors seem to lose sight of is that most people spend all they get, so they end up getting 100% on any dollar anyway, simply because it goes through the system so many times. Person generates a product and sells it (pays gst). Person then buys food, petrol, consumer goods (pays GST). Shop owner pays wages to staff who then buy food, petrol, consumer goods (pays gst). And so on and so on…… The more people make, the more government makes, which means the more they have to pay out and the wealthier we all are. It’s a pretty simple equation and i can’t figure why governments go to such great lengths to fuck it up.
October 18th, 2009 at 11:30 am
Just a short response to some good observations raised by Tauhei Notts.
The livestock valuation rules cause specific problems because of the significant value of livestock, the differeing classes of livestok, and because unlike other forms of trading stock, with livestock we get natural increases. In the paper under Questions and Answers we have attempted to design a method for dealing with livestock that fits with these proposals. We are very interested in how we can make the proposals work for farmers given the number of farmers that could potentially fall into the less than 1.2m t/o proposal. We welcome comments on our thoughts.
The social policy taxes such as child support, student loans and working for families tax credits fit well with these proposals. In relation to the 1.2m t/o proposal, the income is measured every two months. Thus to determine, say, child support, either the percentage of income payable in child support is adjusted to a two-monthly basis (i.e. child support is paid as 18% of income up to a fixed amount, so that could be adjusted to 3% of two months earnings) or the two-monthly earnings figure is annualised, and the child support liability calculated paid on that basis. This means that in good periods when income is high, child support liability will be high. However, in an off season when income is low, child support will be correspondingly low. Working for families tax credits will be the same, that is, when income is high, working for families credits will be low and when income is low working for families credit high. We acknowledge that there is pros and cons here, but measuring liabilities and entitlements on a two-monthly basis (and recalling that income is calculated on a cash basis) may well give a better match. For example, for self-employed, if they get to the end of their year and discover that their income is higher than predicted they may face child support arrears for the past year and the possibly an over payment in any working for families credits received. Under a two-monthly approach this all goes. The tradeoff is the fact that measuring social policy obligations every two months may give a different outcome than we get for a 12 month period or tax year. But then recall that the measurement of income on a 12 months basis is arbitrary as well. What we are advocating does require a small shift in the old “annual” paradigm to a two-month approach with no annual square up. Again, comment is welcome on this.
Kiwisaver contributions will be calculated as a percentage of the two-monthly earnings or the business can contribute the amount it sees appropriate.
Foreign investment fund income admittedly is a little more difficult because of the basis these rules use to measure FIF income. The proposal in our paper is based on the taxpayer paying tax on a cash basis when they actually have the income coming through the door to settle obligations. Consistently with this approach then people with FIF interests will be exempted from the FIF rules and pay tax on dividend income when it is received. An alternative would be to modify the 5% fair dividend rate FIF method to work on a two-monthly basis. This can be easily achieved, but we prefer the simpler method of returning to paying tax on cash dividends for small taxpayers. This point was not discussed in the paper as we wanted to focus on the higher level concepts without getting into two much detail. However, thank you for raising this.
The foreign dividend withholding payment rules are being phased out so and replaced by income tax. Under these proposals then, if a company is in receipt of a dividend, the company will pay tax on the dividend when it is received.
Finally you note that tax simplification is an oxymoron. What we are trying to do is find a way of making tax simplification possible. Nothing ventured is nothing gained. Rather than ourselves and others telling Government the problems, with the assistance of the business community we hope to be able to offer Government some solutions.
Thank you for your comments.
October 18th, 2009 at 11:52 am
A short response to Wreck 1080
People can pay GST based on the ratio option. How our proposals (the 1.2m t/o proposal) differs from the ratio option is that you pay income tax every two months and, like GST, that is the end of matters for that period. Whereas with the ratio option (that calculates provisional tax as a percentage of GST output tax) you are still assessed for tax on an annual basis, which means you still face making year end adjustments such as trading stock valuations and accruals for certain prepayments. Also, many small business that operate through a company cannot use the ratio method because the GST is paid in the company and provisional tax paid in the shareholder’s name. Our proposal also deals with that also.
Depreciation will simply be a two-monthly calculation. For example, if an asset costs $12,000 and is depreciated at 10%, annual depreciation is $1,200. Under our proposal you would claim $200 every two months. We have proposed that assets (other than buildings) be pooled and depreciated at 20%. A question arises about square ups when an asset is disposed of. The simplest way of dealing with this in our view is to remove the overs and unders square up when the asset is sold.
Again, as with all thinking in the proposal, thoughts and comments are important to gauge the effectiveness of the proposals.
Thanks for your comments.
October 19th, 2009 at 8:24 pm
I am still confused NZICA. What about startup capital. Usually a business won’t produce a profit after 3 to 5 years. What happens then?