Time is money: simplifying taxation of small business in NZ

16 May 2012

Time is money

The New Zealand Institute of Chartered Accountants (NZICA) has today released the second instalment of its thought leadership paper on ways to simplify taxation for New Zealand’s thousands of small businesses.

The tax system is all about balance between minimising compliance costs and maximising revenue. But with much tinkering overtime it has become overly complex, says NZICA Tax Director Craig Macalister CA.

“We propose a rule of one for small business. No more than one hour, one return, and one payment each month for income tax and GST compliance.

“By our calculation, that’s thousands of hours freed up from compliance to focus on what small business owners do best. We also don’t believe Inland Revenue has anything to fear,” says Mr Macalister.

We believe there is value in decoupling the system for small businesses from the system that applies for New Zealand’s larger, more complex, businesses. A simplification of rules would create an environment that is more conducive to business growth and productivity.

It’s NZICA’s view that if the GST base could be used as a basis for calculating and paying income tax, then income tax compliance costs will be largely absorbed into existing GST compliance costs.

The proposals in the paper are two-fold: a turnover tax model for micro businesses (not GST registered and no staff), and a system based on GST for small businesses (turnover less than $600,000).

“This paper is about presenting a constructive thought piece to government and business. We are very aware that the proposals in the paper cut across established income tax accounting – but we believe that this is necessary in order to deliver simplicity to small business owners.

“Similarly, we recognise that the ideas presented in the paper may generate less tax compliance and related work for our members. We are however strong advocates for freeing up Chartered Accountants to spend more time doing what they do best: focussing on adding value to businesses to help development and growth,” says Mr Macalister.

Summary of proposals

Micro business tax
A business with no employees, turnover of less than $60,000 and unregistered for GST.
• A final income tax rate of 14% for businesses that are not traders and 7% for businesses that trade in goods (such as retailers) will be paid on business turnover.
• Tax payments will be made monthly or at any time.
• No filing of returns.
• The micro tax of 14% and 7% 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.

Small business tax
A business with turnover of $600,000, GST registered and may have employees.
• Income tax will be calculated on a cash basis on the GST return and will be essentially a final tax.
• Small businesses that trade 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.
• Trading stock and plant equipment purchases are deducted on a cash basis.
• No provisional tax, no fringe benefit tax and no entertainment tax apply.
• There are no balance date and square up issues such as stocktakes.

New Zealanders can access a copy of the paper at www.nzica.com/smetax

ENDS

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