End in sight for tax ‘despair’
Pay tax as you go
A business taxation overhaul announced yesterday by the Government could stop company owners falling into a ‘‘spiral of despair’’, a tax expert says.
Prime Minister John Key said the Inland Revenue Department would scrap some of the more onerous penalties on overdue tax and revamp provisional tax to make it more business-friendly.
The reforms would cost the Government $187 million over four years, he said.
Provisional tax has been one of the biggest bugbears for hundreds of thousands of small firms as it requires they forecast their income a year ahead and pay tax in advance, with steep interest charges and penalties if they underestimate their future profits.
Key said the tax changes would make it easier for smaller businesses in particular to comply with their tax obligations.
EY executive director David Snell said the changes were the biggest shake-up for provisional tax in 20 years and the first ‘‘concrete fruits’’ of Inland Revenue’s $1.5 billion-plus Business Transformation project.
Chris Cunniffe, chief executive of tax-pooling company Tax Management New Zealand, believed the reforms would be ‘‘very popular with small businesses’’ and went about as far as expected.
The biggest change was that the Government would eliminate or reduce the 9.2 per cent interest charged on provisional tax underpayments for the vast majority of taxpayers, he said.
Up to 110,000 small businesses with a turnover of less than $5m will get the option of paying their tax on a ‘‘pay as you go’’ basis through their accounting software.
Accounting software company MYOB said that could be a ‘‘game changer’’ for small businesses.
But Cunniffe cautioned it might be a challenging option for firms that didn’t accurately record their financial transactions.
Green Party revenue spokeswoman Julie Anne Genter said making tax easier for small businesses was positive but had taken too long. ‘‘This is something the Greens campaigned on nearly five years ago.’’
Labour spokesman Stuart Nash said the reforms ‘‘did not free businesses from the shackles of pro- visional tax’’, contained a clause that allowed big businesses to avoid paying tax and queried whether they really would make life easier for small firms.
The way provisional tax currently works is that business owners estimate their likely tax bill for the coming year and pay the amount of tax they expect to owe in three instalments.
Key said the new PAYE-like option would ‘‘match income as it is earned’’ and integrate tax into normal business practices.
Another change will allow about 130,000 self-employed people to choose their own withholding tax rate. At the moment, deduction rates are set by Inland Revenue and vary according to the industries in which people work.
The third leg to the reforms will axe some late-payment penalties.
Inland Revenue will scrap the 1 per cent ongoing monthly penalty for new income tax and GST debts run up after April next year.
An initial 1 per cent penalty that applies to late payments and the 4 per cent penalty on debts that are more than a week old will remain. So will interest charges on overdue tax.
Adding monthly penalties on top was too burdensome, Key said.
Cunniffe said the additional penalties had sent people into ‘‘a spiral of despair’’ and pushed businesses over the edge.