Budget 2016: Tax Reform
SME Tax Friendly Package
Reform of Provisional Tax with the introduction of a new Pay-as-you-go option for small businesses to pay tax as they earn the income. This measure is expected to be introduced from 1 April 2018.
The proposal involves allowing small businesses to adopt an Accounting Income Method (AIM) to calculate their provisional tax and allow the tax to be paid through their accounting software. It’s available for businesses with an annual turnover under $5M who use appropriate software. The tax to be collected will be set as a ratio to that income and will be calculated by the software automatically and paid at the same time as their GST returns are filed. This contrasts with the three provisional tax instalments (on 28 August; 15 January and 7 May for a standard 31 March balance date) and a final terminal tax date of 7 February the following year. It is aimed at making it easier for a business to pay their income tax while the income is earned and may suit a business which perpetually struggles to retain sufficient funds to meet larger instalments.
Differences arise between accounting profit and taxable income as the Income Tax Act includes specific rules around the recognition of income and the deductibility of expenditure which may not always align with the way in which those items are treated for accounting perspective. However for many small businesses such differences will often not be significant. However the GIGO (Garbage In Garbage Out) principle remains and those businesses wishing to adopt this option will need to make sure their coding for the accounting entries and the manner in which the real-time information is provided to Inland Revenue accurately reflects their expected end of year results.
They will also need to look closely and assess the impact this Pay as you go method would have on their cashflows.
Removal of Use of Money Interest (UOMI) on the first two instalments of provisional tax for taxpayers who use the uplift method.
Any reduction in the burden of UOMI is welcome. This will encourage more taxpayers to pay on the uplift method except in circumstances where their expected taxable position for the year is significantly trending down.
Increase the threshold to $60,000 (from $50,000) of residual income tax before UOMI applies. It applies to individuals, companies and trusts.
Government funding should not be dependent on earning large sums of UOMI. It is anticipated this will remove some 67,000 taxpayers from exposure to UOMI.
Allowing companies to pay tax on behalf of shareholders.
This is intended to remove shareholders who have the company pay their tax to be removed from the exposure to provisional tax. It will be a choice that needs to be evaluated.
Allowing contractors; labour-hire firms and others to determine their own withholding rates.
Such firms will agree a withholding tax rate with Inland Revenue and then have that amount withheld by customers who are paying for their services. This shifts the onus to the customer who will have the obligation to withhold but will assist in the collection of tax at source for such firms and remove many of them from the provisional tax regime.
Removal of the 1% monthly late payment penalty to be scrapped from 1 April 2017 for subsequent GST, provisional tax, income tax and Working For Family Tax Credits. Immediate late payment penalties and interest charges will continue.
Any taxpayer who has been in debt with Inland Revenue – for whatever reason – will have been alarmed at how quickly such incremental penalties accumulate Add to these monthly late payment penalties, a relatively high rate of UOMI and the initial late penalty can mean the penalties and interest can often exceed the core tax. It has been more of a stick than a carrot to encourage payment of tax. However for many the penalties become unsurmountable – especially for taxpayers who are in default because they have lost money - often a request for remission of those late payment penalties has to be negotiated with the Inland Revenue in an attempt to negotiate a settlement of the debt. The Inland Revenue in many cases have been willing to accept such remission which possibly reflects how unjust such penalties can be. While the penalty is to be removed only for new debt from 1 April 2017; we hope that Inland Revenue will continue to have a sympathetic approach to remission of incremental late payment penalties in cases where there are genuine reasons for tax debt not being met on a timely basis.
Supplementary Simplification Measures
There are a number of simplification measures which are aimed at reducing the cost of compliance and making it easier for taxpayers to comply with their obligations. These include reforms on FBT, simplifying deductions on dual use of vehicles or houses; removing the need to renew RWT certificates of exemption; making it easier to adjust previously filed returns and modifying the 63 day rule.
Targeting Multi-national Companies
NZ continues to participate in the OECD’s Base Erosion and Profit Shifting initiatives
Recent announcements on country by country reporting and transparency are consistent with these initiatives. Further BEPS proposals can be expected to be assessed on a case by case basis. New Zealand’s international tax regime is reasonably comprehensive and consistent with most overseas regimes. There is arguably therefore no immediate need for reform. Undoubtedly New Zealand will play its part and legislation to increase sharing of information between our treaty partners and increased disclosures. Compliance costs for doing business offshore and for non-resident companies doing business in NZ will no doubt increase. Compliance with transfer pricing policies will be paramount.
Residential Land Withholding Tax (RLWT)
Targeted withholding tax to collect tax on gains on sales of real property within the two year bright line test.
It applies from 1 July 2016 and is specific to non-resident vendors. The withholding tax is to be withheld generally by the vendors conveyancing agent and is calculated based on the lesser of 33% (28% if a company) of the gain or 10% of the sales price.