Ralph proposals for tax simplification for small businesses
The emphasis of tax simplification in New Zealand over the past two years has been on removing the need for wage and salary earners to file IR 5 tax returns, thus providing substantial compliance cost reduction benefits for these taxpayers.
With the recent release of the discussion document Less Taxing Tax, the focus has moved to the compliance cost concerns of small business.
As part of this emphasis on small business tax simplification, I and two Treasury officials recently visited Canberra to talk with officials from the Australian Treasury and the Australian Taxation Office about the recent Ralph Review of Business Tax. We also met with John Ralph, Chair of the review, an enthusiast for the consultative approach to tax policy. In the course of the various discussions there were even a couple of compliments for New Zealand's generic tax policy process.
My main reason for the visit was to identify measures in the review that could be used to help progress small business tax reform in New Zealand. Although many of the Australian proposals have a simplification benefit, the review considered that the significant compliance costs imposed upon small businesses, in particular, required a special simplified tax system for small businesses. This simplified system consists primarily of:
- Cash accounting. Allowing taxpayers to calculate their income using a modified cash system rather than an accruals system.
- Simplifying depreciation adjustments. The review proposes simplified depreciation rules for tangible assets. Depreciable tangible assets costing less than $1000 would be written off immediately, while other assets with an effective life of less than 25 years would be pooled and depreciated at 30% on a declining value basis, with write-off of the balance if less than $1,000.
- Simplifying trading stock requirements. Taxpayers using the simplified system will not be required to make trading stock adjustments if the values of opening stock on hand and closing stock on hand can reasonably be estimated to be less than $5,000, or the difference in value between the value of stock that the taxpayer has power of disposal of at opening stock time and closing stock time is less than $5,000.
Businesses eligible to elect to be taxed under this system are those:
- whose annual turnover is less than $1 million (exclusive of GST);
- who derive less than 5% of their income from leasing; and
- who meet requirements not to be part of a group (these requirements have not yet been specified).
It is interesting to note that the proposals are targeted at taxpayers who are less significant in revenue terms, which allowed more scope for reform, while ensuring the overall efficiency and revenue objectives of the review were met.
We need to consider any implications the Australian proposals have for New Zealand, and we will be looking at these over the next few months. One point already identified, however, is the significance of the starting position. For example, the costs and benefits of a pooled depreciation scheme depends significantly on whether you start with a general position of economic rates of depreciation or whether your base has significantly faster than economic rates of depreciation.
Keith Taylor
Manager, Business/International Unit