13 April 2016
Budget 2016: Pre-Budget Speech to Business New Zealand event Wellington
It’s good to be back here for my annual pre-Budget speech and I want to thank Business New Zealand for hosting me once again.
This year’s Budget will be delivered against a backdrop of a growing economy, supported by strong levels of tourism and migration, a large pipeline of construction projects and low interest rates.
Notwithstanding challenges in the dairy industry, most New Zealand forecasters are predicting growth of around 3 per cent on average over the next few years.
That’s a good position for the country to be in.
In fact, over the last five years New Zealand has had one of the fastest growth rates in the OECD.
However, nothing is guaranteed.
There are always risks, and at the moment these revolve around issues like the ability of China to smoothly negotiate its economic challenges.
On the other hand, the economy could do better than forecast.
That’s why the Government takes a medium-term approach to fiscal policy, looking through ups and downs and focusing on the overall path of the Crown’s finances.
That path shows increasing surpluses and government debt falling below 20 per cent of GDP, in line with the Government’s objectives.
Every year at this event I try to talk about an aspect of the Budget that’s relevant for Kiwi businesses and I’m going to do so again today.
Last year you might recall I announced an increase in Callaghan Innovation’s co-funding budget.
Our efforts to raise business innovation are paying dividends, with a Statistics NZ survey last week reporting a 15 per cent lift in business R&D activity in just one year.
Today I’m going to announce some tax changes that will be positive for businesses, and especially for smaller businesses.
But before that I want to run through some of our other activities in the business space.
The first point I want to make is that government is a big business in its own right.
We own and operate hospitals and schools, for example, provide law enforcement and defence services, and run transport, electricity and housing businesses.
Excluding transfers, we are a quarter of the economy.
Our biggest contribution to New Zealand’s productivity is in running our 25 per cent better.
And by keeping our spending in check we reduce some of the burden on taxpayers and provide more space for the internationally competitive sectors of the economy to grow.
So the Government is continuing to get its own house in order – making sure we are good providers of services and good owners of assets.
In our welfare and social housing reforms, for example, we are promoting more competition, using more commercial tools like actuarial valuations, and focusing on getting our customers back to independence.
A private sector business needs to understand its customers because they drive its revenue.
We need to understand our customers because they drive our costs.
We are digging into these costs and the information is leading to important changes in the public sector.
Alongside other programmes, this approach is helping to reduce government spending as a proportion of GDP, as well as getting better results for New Zealanders.
The Treasury has calculated that in structural terms – so not including cyclical factors like whether the economy is in a boom or a recession – government spending increased by eight percentage points of GDP between 2004 and 2009.
That increase was simply unaffordable and would have seen a blowout in government debt.
In response, our approach has been to reduce Budget operating allowances, make efficiency savings across the public sector, and shift the focus of government agencies onto working together to achieve results under an assumption of limited new funding.
As a result, we have reversed most of that increase in spending from the mid-2000s and got the operating balance back into surplus.
So an important role for the Government in supporting business activity is to keep its own house in order.
Another is to provide an environment where businesses can be flexible and resilient.
The business growth agenda is the master list of hundreds of government initiatives in this area.
Let me mention just a few.
New Zealand’s future is in being an open, outward-facing country, welcoming of people and ideas from other countries, and part of wide-reaching global supply chains.
It’s worth reminding ourselves that 99.9 per cent of the potential customers for our products live overseas.
Many of these are in the fast-growing Asia-Pacific region that surrounds us.
That’s why the TPP agreement is so important – it puts a crucial piece into the jigsaw.
When TPP comes into force, New Zealand will have free trade relationships with China, Hong Kong, Chinese Taipei, Japan, Korea, the ten ASEAN countries, Australia, Chile, Peru, Mexico, the United States and Canada.
That’s pretty much the entire Pacific Rim.
In particular, our TPP partners the United States and Japan are the biggest and third-biggest economies in the world.
A quarter of all household consumption in the world happens in America.
So we need to be in TPP – it keeps us connected to the world.
So too does ultra-fast broadband.
It makes the world smaller for New Zealand businesses, helps their productivity and makes them more competitive.
Our ultra-fast broadband programme has businesses as one of its top priorities, alongside schools and hospitals.
Our goal was to have 90 per cent of businesses in UFB coverage areas able to connect to faster, more reliable broadband by the end of 2015.
We exceeded that target.
In fact, 97 per cent of businesses in these areas – more than 200,000 firms – can now connect to UFB.
Technology is changing the way New Zealand firms do business.
It should also change the way they interact with the Government.
One of the Government’s 10 key result areas, alongside things like reducing welfare dependency and increasing educational attainment, is to ensure that New Zealanders can complete their transactions with the Government easily in a digital environment.
Two areas we are focusing on are ACC and tax.
Both are going through big transformation programmes.
Improvements to ACC have also led to significant levy reductions.
In total, employers, workers and motor vehicle owners are now paying $2 billion a year less in levies than they were five years ago – the equivalent of a sizeable tax cut.
In 2011/12, employers paid $1.47 in work account levies for every $100 of their payroll. Now they pay 80 cents.
Back then, the average ACC levy per motor vehicle was $335. Now it’s only $130 – a reduction of over 60 per cent.
ACC also launched a five-year transformation project, with a focus on improving the service it provides to business customers.
The programme includes digital services that will provide businesses with real-time information on injury rates and trends in their workplaces, and support them to develop more effective injury prevention initiatives.
Technology is also affecting the way businesses interact with Inland Revenue.
Around 30 to 40 per cent of businesses currently use cloud-based accounting software but this is expected to grow to 85 to 90 per cent in the next 10 years.
We want the tax system to fit in with how businesses operate, not the other way around.
That’s the idea behind Inland Revenue’s business transformation project.
The intention is for businesses to see information and interact with Inland Revenue through an on-line account.
Compliance costs will be reduced by using a business’s normal processes and systems – especially accounting systems – to meet tax obligations.
This will make it easier for businesses to get things right and harder to get things wrong, allowing them to focus on running their businesses with tax as a secondary consideration.
The move to a new information system provides an opportunity to revisit New Zealand’s business tax rules.
We have grasped that opportunity.
So what I want to announce today is a new SME-friendly tax package that I think will be welcomed by all businesses, and especially by smaller ones.
The package will make paying tax easier and more certain, reduce the burden of interest and penalties, and help smaller businesses tailor payments to their own circumstances.
I think everyone acknowledges that meeting tax obligations is a particular challenge for smaller businesses.
Among other things, businesses tell us that provisional tax is hard to get right and expensive to get wrong.
Perfect accuracy can sometimes be costly in a way that doesn’t seem justified.
And some penalties are seen as punitive and discourage compliance.
So we have developed this tax package to make it easier for smaller businesses, in particular, to comply with their tax obligations and therefore reduce costs and distractions.
There are three main parts to this package.
The first relates to provisional tax.
Among other things, we are going to eliminate or reduce use-of-money interest for the vast majority of taxpayers.
And we are going to give small businesses – those with a turnover of less than $5 million – the opportunity to choose a new “pay-as-you-go” option for provisional tax.
The way provisional tax currently works is that people, by one method or another, estimate their likely tax bill for the coming year and pay that amount in three instalments.
This new option drops the estimation part and instead works out your tax payments on an ongoing basis throughout the year.
Every two months your accounting software will calculate your taxable income for that period.
You’ll be prompted to make the right tax payment directly through your accounting system, and generally at the same time as you pay GST.
Under this new “accounting income method”, provisional tax payments will more accurately match income as it is earned, be made more regularly and be integrated into normal business practices.
Use-of-money interest won’t apply to taxpayers who choose this method and who pay their tax on time.
Up to 110,000 small businesses could be eligible to use the accounting income method, starting from 1 April 2018 when Inland Revenue’s new computer system is up and running.
I welcome this initiative because it means small business owners and managers can get on with running their businesses rather than being tied up in tax compliance.
That’s what we want and what businesses want, so it’s a win-win.
I mentioned use-of-money interest a moment ago.
This, as you know, is paid, or received, on the difference between a business’s actual tax liability for the year and what they paid in provisional tax.
This is only known at the end of the year.
We want to get a lot more businesses out of the use-of-money regime because interest charges are often burdensome and frustrating for taxpayers who are simply following the rules.
The accounting income method will help do that for many small businesses.
In addition, taxpayers who continue to use what is currently the most common method for calculating provisional tax – the standard or “uplift” method – won’t be subject to use-of-money interest if their tax liability for the year is under $60,000 and their tax is paid on time.
That includes companies, as well as individuals, and will take up to 67,000 taxpayers out of the use-of-money interest regime altogether.
For taxpayers with a tax liability above $60,000, and again who use the uplift method, use-of-money interest will only apply from the third and last instalment of provisional tax.
This change potentially benefits a further 19,000 taxpayers.
It will also give bigger taxpayers the chance to do a “square up” in their last instalment, since by then they’ll have a good idea of their actual tax position for the year.
In that case, they will have paid the right amount of provisional tax so won’t be subject to interest.
The combination of all these changes means that the vast majority of taxpayers either won’t pay use-of-money interest or will pay significantly less than they do now.
That’s the first part of the package – provisional tax.
The second part of the SME-friendly tax package I’m announcing today gives more flexibility for contractors to choose a withholding rate that suits their individual circumstances.
Payments to around 130,000 contractors each year have withholding tax deducted from them.
Many of you will have seen the form that says if you are a shearer you’ll have payments withheld at 15 per cent, if you’re a freelance journalist they’re withheld at 25 per cent, cleaning contractors at 20 per cent, and so on down the list.
You may well have scratched your head at these differences.
We are going to make the system more flexible.
From 1 April 2017, it will be easy for contractors to choose their own withholding rate, subject only to a minimum of 10 per cent.
This means contractors can take into account their individual circumstances, which of course they know better than anyone else.
If an accurate rate is chosen, contractors may no longer be forced into an “over-withholding” situation or an “under-withholding” situation that could see them liable for provisional tax.
It’s in their interest to get it right.
Contractors who aren’t currently subject to withholding tax rules will also be able to elect into this system, with the payer’s agreement.
And withholding tax rules will be extended to contractors engaged through labour hire firms.
The third part of the business tax package is about late payment penalties.
For new debts after 1 April 2017, the 1 per cent ongoing monthly penalty will be scrapped for income tax, GST and some other payments.
The immediate penalty that applies to late payments, and the 4 per cent penalty after a further week, will remain.
So will use-of-money interest on overdue tax.
But a 1 per cent monthly penalty on top of all this, as we have at the moment, makes the combination of penalties and interest very burdensome.
We need to be realistic.
Building up a very large debt to Inland Revenue is often an ineffective way to get individuals and businesses to resolve their tax situation.
And a large portion of penalties is uncollectable and is simply written off.
The Government encourages compliance and wants to give taxpayers more opportunity to talk to Inland Revenue and work out a way to repay their tax debts before they become too big to resolve.
So these are the new measures we’re introducing for provisional tax, withholding tax and penalties.
There are a few more parts to the package but those I’ve talked about today are the main ones.
Inland Revenue is releasing an issues paper today that goes through everything in the package in great detail, as you’d expect.
Your feedback is welcome.
The whole package will cost $187 million over four years and comes out of the new spending allowance for this year’s Budget.
Some of the more complex measures will be implemented through Inland Revenue’s new IT system in 2018, but most of the changes will begin on 1 April next year.
Ladies and Gentlemen.
This is just one of the many measures you will see in the Budget on May 26.
That Budget will continue the National-led Government’s track record of responsible fiscal management.
It will contain initiatives to help build a more productive and competitive economy and to deliver better public services.
And it will show how the Government is continuing to support the rebuild of Christchurch.
Forecasts will show a growing economy, rising employment and higher wages.
New Zealand is in good shape.
The Government has a busy programme ahead of it.
Providing we stick with that programme, I’m confident we can deliver the opportunities and security New Zealanders and their families deserve.
Media Contact: Michael Fox 021 906 614
Hon Michael Woodhouse
Minister of Revenue
13 April 2016
Budget 2016: SME-friendly tax package
An SME-friendly tax package announced by the Prime Minister today will reduce compliance costs and make tax simpler for small businesses, Finance Minister Bill English and Revenue Minister Michael Woodhouse say.
“The package will make paying tax easier and more certain, reduce the burden of interest and penalties, and help small businesses tailor payments to their circumstances,” Mr English says.
“We want the tax system to fit in with how businesses operate, not the other way around.”
Key measures in the proposal are that:
- Provisional tax is being reformed, with a new pay-as-you-go option giving up to 110,000 small businesses a way to pay tax as they earn income from 1 April 2018.
- Use-of-money interest will be eliminated or reduced for the vast majority of taxpayers.
- Contractors will be able to choose a withholding tax rate that suits their needs, rather than one being set for them.
- The ongoing 1 per cent monthly penalty will be scrapped from 1 April 2017 for new debt – although immediate penalties and interest charges for late payments will continue to apply.
Mr Woodhouse says the changes are part of a wider business transformation programme which will support the use of new technology to make it easier to deal with Inland Revenue.
“Around 30 to 40 per cent of businesses currently use cloud-based accounting software. This is expected to grow to 85 to 90 per cent in the next 10 years.
“This package allows small businesses to pay provisional tax through their accounting software, rather than having a separate process for their taxes.
“Small businesses are the backbone of the New Zealand economy. We want to help them spend more time focused on their business, not their taxes.”
The package is expected to cost $187 million over four years.
To find out more, and to provide comment on the proposals, visit www.makingtaxsimpler.ird.govt.nz. Submissions close on 30 May.
Hon English: Cameron Burrows 021 937 401, Nicola Grigg 021 617 862
Hon Woodhouse: Yvette McKinley 027 427 7297
- General questions
- Simplifying tax paid during the year
- Sharing information to improve markets
- Making the system fairer
- Paying tax based on income to date (AIM)
- Paying tax as agent
- Self-management and integrity for contractors
- Before and after examples
Q Why has the Government focused on tax reform for small business?
A The reforms will benefit all businesses, however small businesses are expected to benefit to a greater degree. Research shows that the costs of complying with tax obligations are proportionately greater for smaller businesses as they often don’t have systems to deal with them efficiently. This package will reduce the compliance burden on small businesses, and enable third parties to provide innovative services to support small businesses.
Q Will there be further business tax reform?
A Yes. There is an on-going focus on reducing the costs of tax compliance on all businesses, including larger businesses. Reform will be more challenging for these businesses as they often have more complex tax issues and bespoke IT systems.
Q What is in the package for taxpayers more generally?
A While the focus is on businesses, it is important to remember that behind those businesses are people. This package of reforms provides certainty, reduces stress and makes new opportunities available for business owners to better manage their tax affairs. Further, the removal of the incremental late payment penalty will significantly help those with Working for Families debt.
Q Are there measures supporting larger businesses?
A Yes. All businesses, including larger businesses, paying provisional tax based on last year’s tax liability will not be charged interest before the final instalment (which is due shortly after year’s end). In addition, greater sharing of information about people who avoid their obligations will better protect successful businesses from being unfairly disadvantaged by those who do not comply.
Q Why is an Issues Paper being released by Inland Revenue and Treasury?
A The Issues Paper, “Making Tax Simpler - Better Business Tax”, seeks feedback on the implementation of these reforms to ensure that the policy works effectively. The paper was released on the day of the Government’s announcement, 13 April 2016, with submissions closing on the 30th of May.
Q How do these reforms relate to Inland Revenue’s Business Transformation programme?
A The business transformation programme will simplify how services are delivered and re-shape the way Inland Revenue works with customers, including improvements to policy and legislative settings. Businesses have told us they want simplicity and certainty when dealing with tax, particularly provisional tax, and for government to make it easier for them to meet their obligations. These reforms meet those needs. They will remove significant sources of stress for businesses and will reduce the time and effort they need to spend on tax, providing them with more opportunities to run and grow their businesses.
Q How much will the Government’s reforms cost?
A The package has an estimated total fiscal cost of $187 million over four years. The majority of these costs relate to changes in the use of money interest rules for provisional tax (this creates a one off cost due to money that would have been paid in one year being received in a later year) and the repeal of the incremental late payment penalty.
Q Why is the Government changing provisional tax?
A Being able to pay provisional tax during the year in a simple, stress-free way is a major concern for businesses of all sizes. A substantial amount of feedback was received in submissions on the Government’s Green paper about the difficulties businesses face with provisional tax. The changes being made will reduce stress for businesses around tax payment time.
Q Who will benefit from the changes to provisional tax?
A All taxpayers will benefit from the changes to provisional tax. For the smaller taxpayer the risk and uncertainty around the total payments required for provisional tax are substantially reduced. Larger taxpayers who commit to standard payments based on last year’s tax liability plus an uplift will also benefit from a reduction in the application of use of money interest.
Q What impact will the reforms have on tax pooling intermediaries?
A Taxpayers can continue to use tax pooling intermediaries to make tax payments. While Inland Revenue’s transformation programme will mean change, there will still be a role for professionals in helping businesses manage their provisional tax payments and tax payments more generally.
Q How will sharing tax information with the Registrar of Companies help businesses?
A Businesses will have greater confidence that they are not dealing with individuals with a track record of significant management issues. For example, Inland Revenue will share information with the Registrar where it sees a banned director still running a company.
Q Does sharing tax information with the Companies Office extend Inland Revenue’s role beyond tax collection?
A No. Inland Revenue will only share information it finds as part of its day to day duties. Those who commit serious offences against the Companies Act are often also a tax compliance risk, and a risk to the wider business community and their employees. Better enforcement of the Companies Act will help to maintain the integrity of the tax system. The Government considers that looking at non-compliance as a whole will achieve better outcomes for businesses and their employees.
Q Why is the Government providing information on significant tax debts to credit reporting firms?
A Businesses will be able to make better informed decisions about those they choose to do business with. Currently, tax debts are an invisible risk. What looks like a viable business may actually represent significant risk once tax debt is taken into account. If an indebted business fails, other businesses may be put at risk. Making significant tax debts public through credit reporting firms helps to mitigate this risk.
Q Is the Government introducing credit reporting of tax debt to raise more revenue?
A No. This reform is designed to protect compliant businesses from those who do not meet their obligations. The business community will have greater visibility of a previously unknown risk.
Q Why use credit reporting agencies?
A The Government wants to make sure that taxpayers who may be reported to credit agencies are treated professionally. Credit reporting agencies provide safeguards such as well-established processes and compliance with an industry code of practice.
Q How does removing the incremental late payment penalty of 1% each month on outstanding debt help struggling businesses?
A Some businesses struggle from time to time to pay their tax. The removal of the incremental late payment penalty will help them resolve their tax debt sooner and more easily, as more of their debt repayments will go towards their outstanding tax, rather than financial penalties.
Q How much will the change to incremental late payment penalties cost?
A In the next four years Inland Revenue estimates it will not impose $260 million of incremental late payment penalties. Most of this would ordinarily end up being remitted and, as a result, the net effect is that $87 million of incremental late payment penalties will not be paid by already stressed and financially struggling businesses.
Q Why is the incremental late payment penalty being removed in stages?
A Inland Revenue’s new technology is coming on stream progressively as part of the Business Transformation programme. The removal of the incremental late payment penalty broadly matches the expected migration of products and services to the new technology, and enables the Government’s fiscal position and the need for equity for all taxpayers to be taken into account.
Q What is the Accounting Income Method (AIM)?
A AIM moves tax from being an extra process to being part of the accounting work a business already does to keep on top of its finances. AIM leverages improvements in technology and software, such as cloud based accounting, to reduce compliance costs on smaller businesses.
Q Will AIM change the way businesses use accounting professionals?
A AIM simply uses the new opportunities technology is providing. AIM will allow accountants to reduce their focus on individual business transactions and the preparation of end of year tax accounts, and focus more on key transactions, exception management and providing business and tax advice throughout the year.
Q Why is AIM limited to business with under $5 million turnover?
A Above this turnover level businesses tend to have in-house professional advice and bespoke accounting systems. The Government will consider how AIM could be applied to larger businesses in future work. The Issues Paper invites submissions from larger businesses on whether they would consider using AIM.
Q Will Inland Revenue have access to all my business information?
A No. Inland Revenue will not be able to access your source data. A pre-agreed and transparent set of summary information will be provided to Inland Revenue when payment is made. The information is a subset of that currently provided on a business tax return. There is an opportunity to also simplify the end of year tax return for users of AIM.
Q Are you forcing businesses to buy expensive software?
A No. AIM will be voluntary. However, the goal of AIM is to significantly reduce compliance costs for businesses, and the Government considers it will be an attractive option. New technology is providing new options for businesses in the tax area as well as in business generally.
Q How was AIM developed?
A The Government has worked with key software developers, such as MYOB and Xero, to test concepts and identify opportunities. The Government would like to thank both MYOB and Xero for their support.
Q How did you work with Xero and MYOB?
A Their key role was helping officials understand software capabilities and identifying opportunities for reducing businesses’ compliance costs. The parties used some highly aggregated anonymous data in order to analyse the fiscal impact.
Q Has a commercial advantage been given to any software developers?
A No. Consistent with normal tax policy consultation processes, public consultation is taking place now that a viable approach has been identified. Nearly two years has been set aside for the development and implementation of AIM. Inland Revenue will work with all interested developers.
Q Is this the first step to move away from annual tax returns?
A The arrival of accounting software has meant that businesses have access to updated accounting information throughout the year. This created the opportunity for AIM by providing opportunities to review traditional year-end activities. The Government will consider further reform in this area in the future.
Q What public consultation have you done?
A Inland Revenue has followed its standard practice of consulting with small groups of relevant stakeholders in the development of any policy. The reforms contained in this package are now available to the wider public to provide comment on. Submissions can be made to Inland Revenue until 30 May 2016. Final policy decisions on these reforms will be made after submissions are received.
Q Why is the online forum only consulting about AIM?
A AIM is the most technical measure in the package, and Inland Revenue and Treasury are seeking more detailed information about how it should work to ensure that it is implemented effectively. AIM needs to closely align with current accounting practices so that it can be easily integrated into natural business processes.
Q What are the benefits of paying tax as an agent?
A A number of shareholder-employees will be able to remove themselves from provisional tax if they choose to. It will not be compulsory. Like other provisional tax methods, most shareholder-employees (alongside their companies) can choose to use this method if it suits them.
Q Will this be compulsory?
A No. Taxpayers will be able to choose to use this option where their circumstances suit one entity paying tax on behalf of shareholder-employees.
Q Is this method too complex?
A This creates an opportunity for a number of shareholder-employees to remove themselves from provisional tax. However, some rules and safeguards are necessary to ensure that those who use this method don’t gain an unfair advantage.
Q Can it be extended to more income and entities?
A Extending the paying as agent option to other types of shareholder income including rent and interest and to other types of entities such as partnerships could be looked at in the future if taxpayers see this as a benefit. At this stage it will only be introduced for the largest group of shareholder payments (shareholder-employee salaries).
Q Why have you extended withholding tax to cover labour hire firms?
A The current withholding tax rules for contractors have not been comprehensively reviewed since 1979. Growth in labour-hire firms since then has been significant and the withholding rules have not kept pace. Inland Revenue has identified issues with contractors working in this industry, including their relatively higher compliance costs and areas of non-compliance.
Q How does this affect contractors?
A The current withholding tax rules for contractors require a fixed, flat rate of withholding. This will often not accurately match their actual income tax liability. Contractors are better placed to know what the right withholding rate for them is as they will have better information about their income and expenses. This measure provides greater flexibility for contractors and allows them to pick the withholding rate that works for them.
Q Is there a risk that contractors will simply not pay their tax?
A No. A minimum withholding rate will be required and Inland Revenue will be able to prescribe a rate if a contractor is non-compliant.
Q Why do labour-hire firms have to withhold tax on payments made to companies?
A The use of a company structure should be made for business rather than tax reasons. Contractors working through companies should have similar rules applied to them as contractors who don’t work through companies. The ability for companies to choose their own withholding rate provides flexibility and reduces the risk of over-deduction of tax.
Q Do other countries have a withholding tax for those earning income through labour hire firms?
A Yes. Australia currently requires withholding on contractors working through labour-hire firms. The rules are based on those in force in Australia.
Q Does this measure apply to clerical/management type work?
A Yes. This applies to all labour-hire firms regardless of the industry they work in.
Simplifying tax paid during the year
Increasing the current residual income tax limit before use of money interest is imposed from $50,000 to $60,000, and extending it to non- individual taxpayers
Stanchion Tech Ltd (Stanchion) is a small company that makes modelling software to calculate the load bearing potential of different kinds of foundations. They pay provisional tax on the standard method (last year’s tax bill plus 5%) and their business is growing.
Stanchion employs an accountant at the end of the year to file their tax return but do not have time to calculate what their tax is likely to be during the year. Instead they simply pay what is required for their provisional tax on each of the three instalments.
Because Stanchion is a company they are liable for use of money interest if the amount they pay through their provisional tax is not enough to cover their end of year tax bill for 2016. This year their provisional tax assessment was $30,000 and they made the following payments, which were all on time:
- $10,000 on 28 August 2015
- $10,000 on 15 January 2016
- $10,000 on 7 May 2016.
When the accountant files their tax return they find that their residual income tax bill is $45,000 which means that have another $15,000 to pay. This amount isn’t due until their terminal tax due date (7 April 2017) however use of money interest is charged and backdated to the three provisional instalment dates:
- $5,000 from 28 August 2015
- a further $5,000 from 15 January 2016
- a final $5,000 from 7 May 2016.
Use of money interest continues to accrue from those dates until the full amount is paid.
Under the existing rules if Stanchion did not pay the remaining $15,000 until 7 April 2017, when it is due, they would be charged $1,727.85 in use of money interest.
Under the proposal Stanchion would not be charged any use of money interest.
Taxpayers who have residual income tax of less than $60,000 and who use the standard method can pay their provisional tax instalments and do not have to worry about being charged use of money interest if their instalments are less than their end of year bill.
Removing use of money interest for the first two provisional tax instalments for all taxpayers who use the standard method to calculate and pay provisional tax
Enterprise Revolution Ltd (Enterprise) is a large company that provides consulting, project management and strategic services. They pay provisional tax on the standard method (last year’s tax bill plus 5%) and their business is growing.
Enterprise has a finance team that tracks the company’s expected residual income tax for the year; however their income fluctuates during the year.
In the 2016 tax year, Enterprise competed for and successfully won a large contract in February 2016. This contract included a substantial payment that dramatically increased their expected profits.
Because Enterprise is a company they are liable for use of money interest if the amount they pay through their provisional tax is not enough to cover their end of year tax bill for 2016. This year their provisional tax assessment was $120,000 and they made the following payments, which were all on time:
- $40,000 on 28 August 2015
- $40,000 on 15 January 2016
- $40,000 on 7 May 2016.
When Enterprise files their tax return they find that their residual income tax bill is $180,000 which means that they have another $60,000 to pay. This amount isn’t due until their terminal tax due date (7 April 2017) however use of money interest is charged and backdated to the three provisional instalment dates:
- $20,000 from 28 August 2015
- a further $20,000 from 15 January 2016
- a final $20,000 from 7 May 2016.
Use of money interest continues to accrue from those dates until the full amount is paid.
Under the existing rules if Enterprise did not pay the remaining $60,000 until 7 April 2017, when it is due, they would be charged $6,911.34 in use of money interest. If instead they paid the $60,000 with their third provisional tax instalment payment on 7 May 2015 they would still be charged $1,845.04.
Under the proposal Enterprise would be charged $5,066.30 in use of money interest if they made their payment on 7 April (a saving of $1,845.04 over the current rules). If instead they paid the $60,000 with their third provisional tax instalment payment on 7 May 2015 they would not be charged any use of money interest
Taxpayers with residual income tax of more than $60,000 and who use the standard method will be able to factor in any unexpected increases in profit when they make their final provisional tax payment and thereby reduce or eliminate use of money interest charges.
Paying tax based on income to date
Introducing a new method for taxpayers with a turnover of $5 million or less that uses accounting results to determine provisional tax payments (to be known as the “Accounting Income Method” or AIM)
Hollyhocks Piggery Ltd (Hollyhocks) is a small farming business that raises, butchers and smokes their own pigs. Lisa owns Hollyhocks and doesn’t like spending time thinking about tax. She uses an accounting software package and has an accountant file her return at the end of the year.
Hollyhocks pay provisional tax on the standard method in three instalments.
Hollyhocks would be required to pay their provisional tax in three equal instalments on 27 August, 15 January and 7 May. Lisa finds this frustrating as most of the farm’s income is received around the Christmas period and she doesn’t understand why she is asked to pay tax during periods that the farm isn’t earning income.
Lisa is also unhappy that when the business does well she is faced with an end of year tax bill – she would rather have it sorted out during the year, preferably when the money is coming in.
Lisa decides to use the Accounting Income Method which calculates her provisional tax instalments based on her actual profit and loss. While she now calculates her tax payments every two-months, she only needs to pay tax when Hollyhocks is earning income. Her accounting software helps her calculate how much tax is due each period.
When the accountant files the return at the end of the year there is very little, if any, additional tax to pay as her accounting software has already factored in all of the income Hollyhocks has earned during the year.
Taxpayers who use the accounting income method can pay their provisional tax as their business earns income, even if that income is irregular or seasonal. When their end of year return is filed there will only be a small difference between what has been paid and their residual income tax.
Paying tax as agent
Allowing a closely held entity to pay provisional tax as agent of the shareholders, and removing them from provisional tax
Autoshop Services 2014 Ltd (Autoshop) is a family business of panel beaters comprising Darren Hemopo and his two daughters Tanya and Cheryl who are all co-owners of the company. The company is successful and the Hemopo family work full time for the business.
In the 2016 tax year Autoshop makes a profit of $180,000. This profit is split equally between Darren, Tanya and Cheryl as an untaxed shareholder salary.
The income allocated to the three shareholders is untaxed. This means that Darren, Tanya and Cheryl all become provisional taxpayers and each of them needs to make three instalment payments during the year.
Autoshop is able to pay provisional tax on behalf of the three shareholders. When the income is allocated to Darren, Tanya and Cheryl it comes with a tax credit which means they do not need to pay provisional tax in their own right.
Shareholder-employees will be able to elect to have the company they own pay provisional tax on their behalf. This could mean that the total number of people having to pay provisional tax will reduce as one company makes payments for several shareholders.
Self-management and integrity for contractors
Allowing contractors to select their own withholding rate
Salesi and Tepora both work as contractors for a number of New Zealand television production companies.
Salesi works as a set designer and does not have many expenses.
Tepora works in post-production as a visual effects artist and has high expenses as she has invested in the hardware and software needed to do her job.
As contractors in the television production industry, both Salesi and Tepora are subject to a withholding tax of 20% on their gross payments.
Salesi’s income after his expenses is very similar to his gross income. The 20% withholding tax does not cover his end of year tax bill entirely and he has to make provisional tax payments during the year to cover the shortfall. He does not like this as he would rather have everything deducted at source.
Tepora’s income after her expenses is much lower than her gross income. The 20% withholding rate is more than enough to cover her end of year tax bill and she has a large tax refund when she files her return. She does not like this as she would rather pay the right amount of tax during the year.
Both Salesi and Tepora could apply to Inland Revenue for a special rate however if this rate needed to change during the year (because their income or expenses changed from what they had estimated) they would need to reapply.
Salesi and Tepora can both tell the companies they contract with to deduct a higher (for Salesi) or lower (for Tepora) rate of tax. This means that they do not have a tax bill or a tax refund at the end of the year. For Salesi this means he does not need to pay provisional tax; for Tepora this means she does not need to wait for a refund.
Contractors have more flexibility to manage their tax affairs during the year based on their individual circumstances and can do so without needing to apply to Inland Revenue.
Extending the withholding rules to cover labour-hire firms
Simon works as a contractor through a labour hire firm. This means the businesses that he works for pay the labour-hire firm who deduct a fee and then pay the remainder to Simon.
Under the withholding rules the business paying Simon’s invoices is not required to deduct any withholding tax as his services are being supplied via the labour-hire firm. This not only means that no tax is deducted, but also that there is no reporting to Inland Revenue of how much income Simon has been paid.
If Simon is a compliant taxpayer then he will declare the income and will likely pay provisional tax over three instalments.
However if Simon is non-compliant he may suppress some or all of his income and avoid paying tax. He may then also seek to access income related payments such as Working for Families or benefits. He may also avoid paying any child support obligations he has for children no longer in his care.
The labour-hire firm is required to deduct withholding tax from Simon’s contracting income before it is passed on to him. They pay this to Inland Revenue and report how much income has been earned and how much tax has been withheld through the existing employer monthly schedule.
Simon’s income is now part of his account and will be automatically included in any assessments made.
Similar to allowing contractors to select their own rates, Simon will be able to select a withholding rate that best meets his individual circumstances.
Sharing information to improve markets
Disclosure of significant tax debt to credit reporting agencies and sharing information regarding serious offences with the Companies Office
Timbernail Importers 2002 Ltd (Timbernail) supplies the building industry with building supplies and machinery. They are approached by Nine Inch Screws 2004 Ltd (Screws) who wants to enter into a long term supply agreement and set up a line of credit.
Before entering into the agreement Timbernail wants assurance that Screws is not a credit risk and seeks a credit report from one
of the credit reporting agencies.
Unbeknownst to Timbernails, Screws has accumulated several hundred thousand dollars of debt with Inland Revenue. When the credit report is provided there is no record of the tax debt as the tax secrecy laws prevent Inland Revenue from disclosing this information. There is a risk for Timbernails that this tax debt may cause Screws to default on any credit agreement.
In addition the Director of Screws has previously been prosecuted under the Companies Act and has subsequently been banned as a director. Inland Revenue are aware of this after it came to light during a recent audit. However the department is unable to bring this to the attention of the Companies office due to the secrecy laws.
Once Inland Revenue discovers that the Director of Screws has previously been banned they advise the Companies Office who can then instigate proceedings. This helps to ensure that people who shouldn’t be running businesses are not able to.
Inland Revenue also notifies credit reporting agencies if Screws debt and compliance behaviour meet a certain standard.
The Companies Office will be better able to act against people who have committed serious offices against the Companies Act or have been banned from acting as a Director. This will reduce the risk of businesses entering into agreements with businesses that are potentially being mismanaged.
Businesses will be able to make better decisions when entering into credit or lending agreements with other taxpayers as significant tax debts will be disclosed to credit reporting agencies.