Questions & Answers

Presently we favour an “opt in” model. This is because the simpler system is inherently more arbitrary. An opt in model allows taxpayers to trade off accuracy for compliance costs. That is, if a taxpayer believes the present (standard) system gives a better tax outcome, and they want to incur the compliance costs of using the standard tax rules, then they should be able to do this.

Once you have elected into either the micro or small taxpayer rules, it is not anticipated that there be an ability to opt out. That defeats the compliance simplicity.

We have explored this idea. The target of our proposals is those businesses that are relatively unsophisticated in terms of their accounting and record keeping methods. It was thought that businesses below the GST registration threshold that wanted to register for GST would be better in the small business tax model.

However one option to include GST registered people in the micro rules while keeping their tax systems as simple as possible, would be to adjust the rate from 15% to, say, 21%.

We want to make it as simple as possible for a business to migrate from the existing standard rules. However the issues can be a little tricky as this needs to be balanced against the need to not create opportunities for people to avoid tax. We set out our initial thinking below but welcome thoughts on this.

Given the completely different basis of taxation proposed for a micro business it would probably be necessary to have a notional business windup, and thus square up the tax liability under the previous rules. As with small businesses, retained earnings will be an issue.

This issue can be a little tricky. For existing businesses, the change would occur for the period after the end of an income year. That is, the results of the previous year’s trading under standard rules would be squared off prior to entry. Capital account (depreciating) assets would move across at their written down value and be amalgamated and depreciated at the new single asset rate (recall though that buildings will use the building rate). Trading stock on hand at year end will be allowed as a deduction in the new entity if it has been paid for. If it has only been invoiced no deduction will be allowed until the invoice is paid.

If businesses have been accounting for income tax on an accrual basis then there will need to be an adjustment back to a cash basis for sales and expenses.

If the business has retained earnings, it may be necessary to pay a tax like the qualifying company election tax to move across or possibly the retained earnings can be carried forward.

The small taxpayer model is analogous to the taxation of a sole trader. Consistently with this, the losses should stay with the shareholders. Thus, if there is a sale of the shares losses incurred will remain with the exiting shareholder(s).

Livestock poses some particularly difficult problems given the significant value of livestock. Allowing all livestock to be deductible on the same basis as our trading stock proposal (which allows deductibility on a cash basis) would pose understandable revenue concerns.

An option we are considering is based on treating the herd as a capital asset that retains its value through animals bred to replace the herd as it ages.

Under this proposal no deductions are allowed for the original herd. On entry to the simplification system the farmer will nominate the number in the herd that is the capital asset. Any purchases / disposals (including deaths) to the herd are capital and adjust the herd number. Any natural increases have no tax implications until disposal, although the cost of breeding and rearing is deductible on a cash basis.

On disposal of the herd, the herd numbers recorded (initial herd plus purchases less sales) will be capital and non taxable. The natural increases will be taxable on sale (as costs of breeding were deductible).

Any additions / disposals of non herd animals are taxable / deductible on a cash basis.

Any progeny / produce will be taxable on a cash arising basis (milk, wool, bred for sale lambs, calves, kids, fawns and the like).