McClay said he did not believe the provisional tax system was “fit for purpose”.
A “business transformation” programme under way at Inland Revenue, which the department expects to cost up to $1.5 billion, could allow firms to pay tax on their income in, or closer to, real time, he said.
It would be “wonderful” if Inland Revenue could get to a point when income was taxed only when it was earned, but any changes would need to be balanced against the Government’s needs, he said.
John Payne, head of tax for the New Zealand Superannuation Fund and spokesman for the Corporate Taxpayers Group, said reform of provisional tax was certainly needed.
Provisional tax is a pain. My company’s income and profit can vary greatly from one year to the next. I don’t even know what the year end is likely to be until around 9 months into it. So often my provisional tax has been over-paid, or turns out to be inadequate and you risk penalties.
A system where say every four months you just calculate your provisional profit and pay 28% of that with a final adjustment after year end, would be much easier.