Small businesses soon to benefit from tax relief
It's not cheap, because it's an incentive to pay on time.
New Zealand’s small businesses stand to be the biggest beneficiaries of tax changes coming into force from next month.
The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act applies from the start of the new tax year, on April 1.
Among a range of changes, it reduces the number of businesses who have to pay use of money interest on their tax payments.
At the moment, businesses pay provisional tax payments for the current financial year, based on the income they reported the year before.
If, at the end of the year, it is found that their income was higher than estimated, and they did not pay enough provisional tax, they are charged use of money interest on the difference, back to the date on which they should have paid it. From May 8, the rate charged by Inland Revenue was 8.27 per cent.
Provisional tax payments are paid in three instalments, so the interest could have accumulated over many months.
The new Act introduces a rule so that use of money interest will only be charged from the date of the final instalment of provisional tax.
It also increases the ‘‘safe harbour’’ under which use of money interest is charged to $60,000 and gives it to companies and trusts for the first time.
Chris Cunliffe, of Tax Management NZ, said provisional tax had been a major headache for small businesses.
‘‘If you don’t pay the right amount, they hit you with a charge,’’ he said.
‘‘It’s not cheap, because it’s an incentive to pay on time. But people who don’t earn evenly throughout the year, or don’t know what their income is going to be, or where there is a change for better or worse, they are still deemed to have a crystall ball to forecast their income. It drives people insane.’’
Now, any business, individual or trust with tax liabilities less than $60,000 will not be subject to use of money interest on their provisional tax payments. Cunliffe said it would take about 67,000 taxpayers out of the interest regime. ‘‘It’s a big win.’’
As of 2018, businesses will also be able to elect to pay their provisional tax every two months, instead of every four.
Accounting Income Method will be offered as an option for taxpayers to pay their tax at the same time as GST, based on the income reported by their accounting software.
It will benefit seasonal workers or those with unpredictable income but could put pressure on cash flow, particularly in those firms invoicing for work but not paid.