Simplifying taxation of small business

Thursday, 18 February 2010 4 Comments

Discussion on proposals to radically simplify the taxation of small business in New Zealand is happening around the country as the New Zealand Institute of Chartered Accountants (NZICA) visits its branches.

NZICA tax director Craig Macalister says the tax process for small business in New Zealand has become convoluted and creates unnecessary compliance costs which undermine productivity.

Approximately 90% of New Zealand businesses have five or fewer employees with about two thirds of these businesses run by owner operators.

"Yet our one size fits all tax system design means we tax the corner dairy under the same rules as our largest corporate taxpayers."

The NZICA and Tax Management NZ have devised some fresh approaches that could ease the tax compliance burden for small business.

The goal is for small businesses to face no more than one hour's work, one return, and one payment every month for income tax and GST compliance.

NZICA assistant tax director Stephen Rutherford has met with accountants in the upper North Island this week and he says they all agree that something needs to be done for the compliance of small businesses.

He has found one of the big concerns expressed by accountants at his presentations has been the large amount of time spent fixing up errors that are made by small business.

"A lot of small businessmen aren't good at the accounting side of things and the problem is that in these hard economic times the cost can be very high."

He says a lot of small businesses do their own GST and unfortunately it's not as accurate as it could be which means accountants need to prepare tax returns and reconcile them with GST as well, resulting in accountants almost doing a service for Inland Revenue in getting it right.

"People at the meetings also agree that fringe benefit tax needs to be rid of as it's too costly, we need to clean up areas of entertainment tax and the multitude of depreciation rates, the margin of tax rates is also a problem."

He says he has heard a lot of people say small businesses are unpaid tax gatherers.

"They gather social policy changes, collect family support and KiwiSaver donations which is at a cost to the employer. It's a cost to small business which is a majority of business in New Zealand and we've got to think about that."

Rutherford also responded to criticism of the NZICA's discussion paper in The Chartered Accountants Journal saying he agrees with some of the points brought up in the Journal however people need to realise that it is a discussion paper where none of the figures are set in stone, so people shouldn't take it as gospel.

"We're happy to take criticism from members on this discussion document, it's healthy and it's great that people are taking an interest in responding.

"We've provided a discussion paper, a starting point, a think piece, one set of ideas and we want feedback on it to make it the best it can be."

The NZICA is hoping that the government will take notice of what it is saying and that it will try and cut down the compliance costs for small businesses.

NetProphet.co.nz would appreciate any comments on the discussion paper about simplifying the taxation of small business in New Zealand. The full discussion paper is here and a summary is below:

SMALL BUSINESS TAX (turnover of less than $1.2 million for a period of 12 months).

• Income tax will be calculated on a cash basis on the GST return, as an adjustment to the GST result.
• Like GST income tax will be paid every two months: there will be no year end adjustments, no provisional tax and no fringe benefit tax.
• Small business that trades through a company or partnership will be taxed analogously to a sole trader by taxing the entity based on the personal marginal tax rate structure.
• Transactions such as dividends and salaries, between the business entity and its owners are eliminated, as is the need to maintain an imputation credit account.
• Income tax and GST will be calculated and paid two monthly on a simplified cash basis.
• There are no balance date and square up issues.
• Trading stock (except for livestock) purchases are deducted on a cash basis - no need for stock takes for tax purposes.
• No provisional tax, no fringe benefit tax and no entertainment tax apply.
• There are simplified rules for depreciation.

MICRO BUSINESS TAX (unregistered for GST, no employees and a turnover of less than $60,000).

• A final income tax rate of 15% will be paid on business turnover.
• Tax payments will be made monthly or at any time
• No filing of returns
• The micro tax of 15% includes a component for Accident Compensation Corporation levies.
• Income for the purposes of social policy commitments (child support, student loans and working for families tax credits) is 50% of gross income.
• The income will be transferred to the taxpayer's summary of earnings and no further income tax on this business income will be payable.
• A transitional rule for people who earn cash "under the table" will give a 12-month window for people to enter the tax system without further repercussion for past undeclared earnings.

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