Simplifying the Taxation of Small Business in New Zealand

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We have written this report for four key audiences and welcome your perspectives to ensure that future tax policies are effected from a comprehensive and holistic perspective. The four audiences comprise:

• Our policy makers including:
  • Inland Revenue, Ministers of Finance, Revenue and Small Business, Tax Compliance, Tax Revue Committee, the Treasurer, the Minister of Economic Development.
• Policy lobby groups including:
  • Business NZ, New Zealand Business Roundtable, EPMU, Chambers of Commerce, EMA , CTU, FANZ
• Business owners – specifically Micro and Small Business owners.
• Accountants

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Alec Smith - 06-Jan-2012 01:14 PM

There are not a whole lot of instances where you may need to identify the owner of an unknown cell phone number; but, I'll tell you what, when the occasion arises, a good
cell phone lookup directory is good to have at your disposal.

paper editing - 05-Jan-2012 09:54 PM

As I see business situation in New Zeland is quite interesting and good!
paper editing

James Westaway - 24-Nov-2011 10:32 AM

Unfortunately, your 15% flat tax proposal for small business is flawed for these reasons:- 1. Most businesses dont make anywhere near 50% margin, so all those below 50% would opt to stay with 30% tax on profit. A company earning 20% pre-tax profit would
be taxed at 75% if they took the 15% option. 2. Any that do make over 50% pre tax profit will opt for the 15% of revenue tax cap. This is known as 'moral hazard' or 'adverse selection' and would reduce your overall tax take. 3. A business making 60% margin
and paying 15% of revenue in tax would be paying 15/60 or 25% tax. Consequently your idea would penalise those businesses working on lower margins. 4. Tax compliance is a useful requirement for small business because they are notoriously bad at tracking their
financial performance. This became evident after the introduction of GST on a bi-monthly accounting basis. In fact SMEs should report P&L monthly within 5 days of end of month in order to be able to quickly take corrective management action. 5. Regardless
of their profit margins, they would all still be tempted to hide income, which is the real problem that needs to be addressed. To solve this problem we need to penalise the accountants who are routinely complicit in this aspect of tax evasion.

Loralie - 16-Nov-2011 08:13 PM

People who work in this area can read a lot of
term paper about this laws and all changes in them.

Lisa - 16-Nov-2011 08:40 AM

Great idea

Bonnie Combs - 06-Nov-2011 01:56 AM

Don't have a lot of cash to buy a car? Do not worry, just because that's available to get the
personal loans to resolve such kind of problems. Therefore get a student loan to buy everything you want.

Tina Mays - 16-Sep-2011 04:41 AM

Don't have a lot of cash to buy a house? You not have to worry, because that's achievable to receive the
personal loans to work out all the problems. Thence get a financial loan to buy all you need.

james - 11-Sep-2011 02:21 PM

No feedback was left by this visitor.

Matt long - 17-Mar-2010 05:41 PM

While I'm all for simplification I have concerns about your proposal for seasonal business, if in Dec we have 150,000 in income, then no net income for 4 months, then outgoings of 100,000 in April, followed by another 100 000 in September, (We're beef farming so don't expect to make a profit.) we appear to have paid tax that inland revenue is making use of money interest from Dec through to September. I don't see any advantage for us in that case.

Sonja - 09-Mar-2010 09:16 AM

When there is a process to chose the taxation system people will be tax by, all people who will pay less tax as a result of adopting that system will adopt it, and all people who will pay more by adopting will not, this will create a whole system of tax planning rather than value-add services, and lead to an erosion of the tax base.
The Institute should not be advancing the destruction of the profession. Our ability to provide value- add work for our clients is directly proportional to training of young accounting staff. Not having a set of financial statements will reduce the number of staff employed in our office by at least five and we are a large employer in a small provincial town.
We were disappointed in the Institute organising a seminar three days prior to the closure of submissions, and taking ideas to the government and others without a mandate from members first. This approach does not reflect well on a member run organisation.
Where is the evidence from Australia as to what happened there, was it successful, and what were the unintended consequences?

Paul Dawson - 01-Mar-2010 09:18 AM

I have previously made some comments but after attending the NZICA seminar last week wanted to add a couple more.

Whilst I very much support simplification of the tax systems for small businesses I am very concerned about the possibility that doing this will increase the business failure rate in NZ further.

What is missing from this debate is how to increase the financial management skills of small business owners and this is a key area that accountants need to get involved in.

If the suggested changes were implemented without consideration to the impact of small business owners not having to go to their accountant then I think the suggested changes will have an adverse impact on our economy and standards of living.

The other thing that I think needs to be considered is what other things do business owners get out of the relationship with their accountant? Little bits of advice that are provided during the presentation of the accounts etc.

Simplifying tax is a good thing but the much bigger issue is why do we have such a high rate of business failure in New Zealand.

Euan Macduff - 09-Jan-2010 07:01 PM

I don't have time to read all this, let alone comment on it, let alone get to grips with yet another alternative, parallel reality in the tax system. -another set of depreciation rules.?
If you want to simplify tax how about:
1.No tax for, say, the first $10,000 income.
2.Abolish FBT.
3.Abolish differential tax rates to discourage the setting up of complex tax structures that serve no purpose other than to minimise tax.ie same top tax rate across the board.
4.Simplify and clarify tax law relating to land and associated persons.
5.Abolish FIF rules for individuals and family trusts.
6.Abolish LAQC's.
7.Make it compulsory for anyone starting up in business to attend a course on self-employment and book-keeping.
8.Abolish Income Tax altogether and double the rate of GST.
Cheers.

Alison Blanchett - 16-Dec-2009 11:15 AM

I feel that this discussion paper has not addressed the main issues facing micro and small businesses. These clients still need accountants and it is very important to advertise this fact rather than put the emphasis on them not requiring accountants anymore. If clients think they can now do their taxes themselve there will be many errors that we will have to correct in the future if they wish to sell their business or require financial reports for their bank. Their cost of compliance will actually increase. We should be strongly advertising the fact that clients need us to keep preparing financial information for that reason and to assist in ensuring their information is done correctly. The majority of my turnover comes from micro and small businesses and this discussion paper would drastically change my business if the institute recommends that clients can do their own GST and taxes. I have felt very unsupported by the institute after reading this paper. More members whom deal with these types of businesses should have been consulted before this paper was ever drawn up. I have also discovered that this paper has already gone to Government for their comments even before it was given to members to comment. Again this makes me feel unsupported and irrelevant to the institute. Micro and small businesses currently don't use us for business planning and cashflow forecasting, we sell this concept to them but they are not buying. it is very short sighted of the author to think they will use us for these services after being told they don't need an accountant to prepare their taxes and GST. The client's will just jump with joy if they don't think they need us for this. Please if this paper is approved then advertise to the general public that chartered accountants can add value to clients by assisting them with GST, taxes and business advice. Do not tell the general public that we aren't needed. I would go out of business.

Harry Jekel - 27-Nov-2009 10:13 AM

Further to my submission/feedback on 22/11/09 describing the all-round benefits of an “Integrated Record Keeping, Quarterly Reporting and Tax Extraction System”, the key to making such a system work in everyone's favour is a more flexible balance date policy for clients of tax practitioners, which would enable tax practitioners to prepare their clients’ GST returns (and calculate their actual income tax) as automatic and therefore accurate/easily verifiable extracts of super-prompt and therefore useful (if not critically important) quarterly financial statements, effectively making the preparation of GST returns compliance cost free (while also doing away with the need for our onerous Provisional Tax and Use Of Money Interest regimes) because the cost of producing up-to-the-minute periodic financial statements would be seen by the client as an investment, as all my clients are happy to confirm.
There was a transitional period (up to the end of the 2008 tax year) during which tax practitioners were allowed to request February or April balance dates for their clients for the purpose of enabling them to complete their clients’ GST returns within the tight deadlines. I can’t see why this had to be a “transitional” period because as clients retire or pass away, tax practitioners do need to replenish their client base and of course if they cannot obtain ‘non-March balance dates’ for their new clients to replace their ‘non-March balance date’ retired clients, they will soon be faced with unworkable bottlenecks during the months their March balance date clients’ GST returns fall due.
Paragraph 52 (c) of Inland Revenue's SPS on elections to change balance dates stated that “smoothing the work flow of the tax agent is not an acceptable reason to change a balance date”. But if a non-March balance date will also provide the many all-round benefits (and no downsides) briefly touched on above and more fully explained in my previous submissions, then once again I wish to submit that these benefits are commanding reasons for tax practitioners who are prepared to go through the effort of updating their systems from an annual cycle to a periodic one to be allowed to change their clients’ balance dates so that they too can serve all their clients with equal respect, as efficiently and effectively as possible, keeping them all (without exceptions) up to date with their businesses and their taxes.
Paragraph 19 of the SPS points out that the Commissioner is required to have regard not only to “compliance costs” but also to the promotion of “voluntary compliance”. Once again I have been allowed to accumulate abundant evidence over the years that an integrated system such as mine (particularly in conjunction with a “true” PAYE system for income tax) will make the world of difference to taxpayers’ attitudes towards their tax obligations and their willingness (and ability!) to pay their “correct” share of taxes (because of the system’s simplicity, transparency, consistency and fairness, not to mention the client’s improved understanding of why so much (or so little) tax needs to be paid (which of course ties in their continually improving ability to synchronise their perceptions of how they are faring with how they are actually faring, which in turn enables them to accurately anticipate the tax they need to pay because it is always paid on a true PAYE basis). This knowledge will not only help clients stay on top of their business but will also help them live within their means which includes making sure there is always enough money in the kitty to pay their tax when it falls due, as my clients have proven by all being fully paid up with all their taxes right up to their latest quarters of their current 2010 tax years.

Wayne Campbell - 24-Nov-2009 04:48 PM

Having been involved specifically in this targeted market and having been trying to reduce compliance costs for SME’s I applaud the 1 hour goal per month. In fact, even under the current regime many of our clients have their basic book work including GST prepared over a cup of coffee once a week.
The trick here will be to establish an equitable system and I believe a turnover model is not the ideal means.
Take for example our independent service stations owners who transact high turnover sales but at minuscule margins.
I certainly encourage the idea of simplifying depreciation and other sunk costs businesses incurr and particularly start-up.
Standardising with Australia’s three monthly cycle should be considered with the client in conjunction with their accountant being able to nominate the period end date. This is to assist CA firms spread the work load and avoid heavy bottlenecks. There should also be the option to file partial periods should the client ever elect to move accountants.
I agree with Rod Drury’s comments on the need for simple systems. I have witnessed over the years a wide variety of systems being used by less than competent clients. The end result being accountants are left to pick up the pieces.
Prior to computer systems, operations were very client centric and finance was accountant centric. With the evolution of computer systems much of the financial control has moved to the client with an expectation of lower fees, but in many cases the reverse has occurred.
It was once stated all roads lead to the general ledger, but the current view is all roads lead to technology, but is that heading New Zealand in the most competitive direction? We must ensure it does and that financial control returns to the experts, with them positioned at the top of the cliff, not at the bottom. Hopefully by spending less time on compliance needs accountants can then add real value by focusing on the performance of their clients going forward, not wasting unnecessary time on what has happened in the past.
Our geographical position in the world means we need to be competitive and therefore anything we can do to incentivise our small business owners has got to benefit society as a whole. I look forward to following developments with interest.
Wayne Campbell (http://accountsonline.co.nz)

Harry Jekel - 24-Nov-2009 08:14 AM

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Chris Hannen - 23-Nov-2009 06:50 PM

Simplification ? - just another set of rules to deal with.
Reducing compliance costs ? - attending to clients work 6 times (ave GST returns) compared to once a year.

Stuart Nicholls - 23-Nov-2009 03:15 PM

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Harry Jekel - 22-Nov-2009 11:20 AM

A tried, tested and proven "Integrated Record Keeping, Quarterly Reporting & Tax Extraction System" for Small Businesses.
(Enabling accountants to treat all their clients with equal respect and at an affordable cost, keeping them fully informed when they need to know and up to date with all their taxes when they can best afford to pay)


System Description:

BankLink Books (or any other compatible system) is installed on clients’ computers. Clients are then trained to perform specific “Weekly, Monthly and Quarterly Procedures” (in conjunction with my “General Recordkeeping Instructions”) to efficiently and effectively keep their financial records up to date. As soon as 3 days but no later than 25 days from the end of each quarter clients email their accountant their BankLink file at which time the accountant reviews all the transactions (which includes accruals) for accuracy and completeness. The transactions are then imported into the client’s “MYOB-AO” general ledger. Any movements in fixed assets (which are automatically depreciated), private/business use adjustments, etc., and the accountancy fee are then accounted for, and the interim results are ready to be viewed ‘on screen’. After ensuring that the actual (“accruals” based) GST Due has been correctly extracted (as instantly confirmed by the GST extraction summary and “GST Checksum” which forms part of Note 1 of the financial statements) and that everything else looks consistent with previous quarters or differs as expected, a spreadsheet (Note 1a of the financial statements) allocates the ‘Net Income Before Tax’ (if applicable), incorporates other income and tax deducted (if any), Working for Families Tax Credits (if entitled), donation tax credits, etc., and calculates the actual Income Tax Due for the quarter. After entering this figure, the financial statements are reviewed once more ‘on screen’ and discussed before they are emailed to the client, together with the updated BankLink file.

On the 28th of the month following quarter’s end the total/net amount of GST and income tax due is direct debited from clients’ bank accounts and then passed on to Inland Revenue through my Tax Holding Account to enable payment without unfair provisional tax / Use of Money Interest implications while also giving clients immediate access to any tax refund / family assistance entitlements.

The quarterly financial statements culminate into one crucial and easily understood figure: The “OVERALL True Surplus/(Deficit)” which reveals the extent to which clients are (or are not!) living within their means (before considering subjective unrealised gains/losses). The financial statements then go on to explain exactly where the surplus went, or more critically, how a deficit was funded. Comparatives going back up to seven quarters enable us to pinpoint exactly where any negative or positive trends are occurring so that we can deal with a minor problem (identified by a negative trend) before it becomes a major one, or take advantage of a positive trend before the opportunity may be lost.

Since the financial statements also serve as the detailed work papers that extract/calculate actual GST and income tax due, they immediately answer any questions clients have about the total tax bill. But because clients quickly learn to correlate the financial (and tax!) effect of their ‘day to day’ business activities with their actual results (thanks to our prompt quarterly reviews and “integration”), the tax bill is never questioned because it is never a surprise.
Even a large tax bill is accepted (if not welcomed) as a positive variable operating cost because clients can understand why it is so high and can see how much is left after tax. Clients also realise that in less profitable quarters their tax bill will be proportionally lower, always remaining in line with their earnings and expectations, and therefore ability to pay. In fact the system has conclusively proven that taxes need never become the heavy burden (if not the impossible hurdle responsible for many business failures) they can so easily and thus all too often turn into under our traditional tax collection process.

The timeliness, clarity and all purpose layout of the quarterly financial statements also make them the ideal information source for banks and other lenders (say to approve a loan or review existing facilities) and any other interested party (say a prospective partner or purchaser), or for any other reason – which could well be a tax investigation…..

Another important benefit of my integrated system is that in the case of a tax investigation the Inland Revenue inspector is in and out of my office with a minimum of time, cost and fuss because of the system’s excellent audit trail, controls and reconciliations which, together with the prompt quarterly reporting cycle and detailed comparative figures, leave very little room for any material error to slip through, while enabling GST and income tax to be investigated simultaneously, often without the need for a visit to the client’s premises at all! This would of course require clients to have their records in good order and be able to produce any source documents the inspector may randomly request to verify that all taxable income has been declared and only expenses which have been ‘necessarily incurred for the purpose of producing taxable income’ have been claimed. So despite the ‘robustness’ of the system, clients cannot ‘slacken-up’ on their “responsibilities” if they wish to be sure of a fast and trouble free investigation.

We all know how tempting it can be to ‘stuff’ that ‘cash sale’ (or any other income for that matter) into our ‘back pocket’, or claim a personal expense as a business expense, or accept a much cheaper ‘cash deal’ from a supplier who we know has no intention of declaring that income. Many of us have ‘forgotten’ however, that not declaring all our taxable income, claiming expenses we know are not deductible, and even “aiding and abetting” a supplier to evade tax (and save money ourselves!) are criminal offences which could put us in jail or at least cost us dearly if caught. But even if we were devious enough (or just plain ‘lucky’) to avoid getting caught, I struggle to see how anyone can gain any real sense of achievement from having ‘got away with’ what effectively amounts to stealing from their country. And as for those who do not feel any sense of guilt because they justify their misdeeds on the (mistaken) assumption that “everyone is doing it anyway”, I fail to see how such an assumption can ever make a “wrong” “right”.

I have good reason to pull on the “heartstrings” of my clients (by expecting them to be honest) because Inland Revenue has also changed its ways for the better over the years. A pertinent example is when it stepped in to overrule and remove from my case a dogmatic inspector who, after I explained that my integrated system had to veer from the “letter of the law” to better meet its intention, was determined to ‘dismantle’ it and force an unimaginable U-turn which would have wiped out all the progress that has been made since 1986 when the system first came to be (albeit in very rudimentary form) with the introduction of GST.

So we really have no reason to argue against the undisputable fact that we are all in this together, giving us in my humble opinion every reason to agree that “doing the right thing” is the only way to go.

Rod Drury - 11-Nov-2009 09:13 PM

It's great to see the thought that has gone into this and some great ideas floated. Thank you.

In our experience small businesses are in all shapes and sizes. So coming up with a formula that fits all will always result in large (actual) numbers of businesses being disadvantaged. As you note, low margin businesses don't suit a turnover approach.

As an accounting software vendor the perspective that we would add is that some of the reasoning behind this paper appears to stem from the way existing small business accounting software works. For example accrual accounting is hard if the software does not do it for you. Yet accrual accounting makes sense because it matches income and expenditure - but in most software systems it's too hard to get both a cash and accrual perspectives.

Compliance costs are high in part because of the friction of accountants getting access to the data. We've heard that 35% of accounting fees are around getting access to the data and 'pick up put down' costs of working in a disconnected way.

So some of the policy suggestions can be addressed with better software that makes the hard stuff easier and reduces the unproductive cost of moving data around (and we're trying to do that as fast as we can). We should not confuse policy suggestions arising from existing software not being smart and fundamental tax changes that can drive productivity. We would see moving to a cash basis as a big step backwards.

An example of good policy that gained limited traction for environmental reasons was the GST Ratio Method for Provisional Tax introduced last year. In part this may have been because accountants did not have good access to client accounting data within the period, without incurring fees back onto business to get a picture of their books. Therefore accountants did not promote the change and it had minimal take up.

Hopefully our perspective adds something to the discussion.

Rod Drury
CEO - Xero (http://www.xero.com)

Iain Phillips - 29-Oct-2009 02:44 PM

An interesting and telling comment from Don Sawden (21 Oct). It is disappointing to see CA's more concerned about their own earning capacity than making life simpler for themselves and their clients. If we want NZ to grow and become wealthier we need the productivity gains that this sort of initiative will bring - it will lift the whole economy. There will always be plenty of work for accountants. Good on you NZICA keep it up.

David Chapman - 27-Oct-2009 09:15 AM

The small business change proposed in paying provisional tax every two months (with the GST return) will have a negative cash flow impact. As a suggestion, could the payment dates for provisional tax remain the same but the IRD use the information from the two monthly GST returns to issue a payment demand. Better still maybe go somewhere in between and pay both GST and Provisional (income) tax every quarter.

bob glen - 24-Oct-2009 02:55 PM

I agree with your proposals for small business tax as it will simplify things however why should returns be every 2 months just because that is the existing GST model? Why not change that as well? In Australia all companies pay both GST and Income tax installments (BAS) on a quarterly basis. That is the model that should be adopted here, particularly for small business if you are serious about cutting down administrative time for samll businesses.

Mike Chai - 21-Oct-2009 04:37 PM

I think we are getting into too much details - missing the forest. It sounds good but I think implementation will be most difficult. People who want to pay will pay. Those tht dont will have further reasons why the system is not fair or difficult to comply. The supporting reasons provided are the most oft heard from people who dont want to pay tax. I have worked in many countries and I think the current system is still the best. Tax the principal income at source. Side inome, the individual decides whether to pay or take the risk and consequences. What we can look at is to increase the threshhold for tax and reduce the maximum tax rate.

Don Sawden - 21-Oct-2009 10:15 AM

This sounds good as a PR exercise but it may not the cheapest option in the long run. However to convince those clients to use a chartered accountant could be very difficult. How would information be assembled to support a loan application?
I do not see the Law Society reducing their members' earning capacity by agreeing to simplify legal work to reduce solicitors’ costs for simple legal work.
Furthermore, I see the manner that this was presented to the Akd Public Practice SIG as underhand and lacking in transparency. It was presented as a new idea to get feed-back and measure our reaction to the scheme. However it was live on TV on the breakfast programme and about two weeks later was in the NZ Herald-- hardly the act of a group seeking the co-operation of people at the coalface.
Again , a great PR stunt, poorly presented and lacking transparency.

Rex Beer - 20-Oct-2009 09:57 AM

I am the owner operator of a business (plant nursery), in partnership with my wife. We established it in 1994. We have accounting knowledge, and do all our taxation requirements ourselves. So, we do not have any expense to satisfy taxation - however, it is complicated, and requires quite a significant time to do it (even after 15 years).

1. Micro businesses proposal :
Our turnover is about $90,000pa so we would not fit in here - but I would like to make some points -
1.1 Even if we would not have to account accurately for expenses, we would still do so - as to know what expenses are incurred is fundamental to managing the business. However, imagine some people might not want to account for expenses.
1.2 Our ratio of expenses to income, is given following, for 15 years since starting (includes capital) -
6.604471195
3.299027298
1.148173883
0.775009582
0.843825054
0.537228988
0.592712669
0.654289399
0.594900564
0.535312774
0.577308606
0.565319287
0.597925472
0.574349199
0.518412808

average 1.227884452
See the ratio started way over 1, because of higher expenses needed to start a busines, and lower income in early years. Eventually it is just over .5 but fluctuates of course.
Your approximation of .5 seems to me to be too simplistic. It certainly achieves "simplicity" but nothing else? During the startup costs period, .5 would be grossly unsatisfactory. And if the actual ratio is more than .5, it is hard to imagine taxpayers thinking .5 is "fair"?
On the other hand, if taxpayers can alternatively opt for actual expenses, a fair option is available. Why would taxpayers adopt the .5 option, if it actually extracts more tax. It is like saying – you can do something simpler, as long as you are prepared to pay more.

1.3 Tax rate: Why 30%? Our marginal tax rates for our business income is 21.5% - so applying 30% would be punitive.

1.4 To cater for real situations, would need to be able to split between more than one person , with possibly different tax rates.

2. Small Business proposal:

2.1 With $90,000pa turnover, we fall in here.

2.2 I fail to understand why there should be any distinction between small and larger businesses. Surely, if it is advantageous for small businesses, it will be for larger? Why not make the tax requirements the same for all business? Far greater advantages to the economy would ensue. Further, this would avoid the huge "can of worms" that is deciding what is small and what isn't.

2.3 There are two things about the existing tax system that particularly gall me.

2.3.1 Not deducting "capital"expenses. I can not see the logic in this. From the taxpayer’s point of view - capital expenses is "spent", ie not available to the owner as income. So, obviously it is very unfair - as people who earn income as salary or wages, pay tax on exactly what income they have - whereas the business has to pay tax on an imaginary "net profit", that is more than the actual income available. In addition, the compliance cost of maintaining depreciation records is major.

2.3.2 Stock! Having to pay tax on a hypothetical increase in stock held - is very unfair. For example, in recent years, sales have fallen because of the recession, so we end up with higher stock unsold - so we have a "double penalty" - we have foregone the income due to not selling the stock, plus have to pay tax on the increase in stock on hand. Moreover – as business grows, stock naturally increases as sales grows; but tax is charged on value that is not actually realized until later; and may not be. Extremely illogical - whoever dreamed that up should be locked up.

2.3.3 If the two above items are removed - ie all capital expenditure deductible, and no tax on stock increase - we have an all-cash expenses tax accounting. Which is obviously far simpler, so compliance cost is reduced; and fair.
Note – we do not use an invoice/accrual accounting basis.

2.3.4.The proposal states ..."a cash accounting basis for income tax means that income tax and GST (payments basis) calculations can be merged."
But I am confused - as below it states ...."things that GST taxes or allows as a deduction but income tax does not, such as capital items."
If this means that it is not proposed that capital expenditure be tax deductible - then a major problem in taxation will continue. Capital expenditure should be tax deductible. Also tax should be removed on stock value change. Then - the system would be both fair and straightfoward, as all expenses deducted for gst would also be deducted for tax.
However I can see some fishhooks the other way - that all expenses deducted for tax, are not all deducted for gst (eg wages). Some way of handling this would be needed. But this should not divert from the basic idea of making tax payable on the same set of income/expenses figures for both gst and tax. The proposal to pay income tax with gst is very efficient – and avoids having to pay provisional tax. It needs to cater for splitting over multiple taxpayers, with different tax rates – it should then avoid us having to put in tax returns.

Who knows - eventually, it might be possible to have this basis accepted by government (ie IRD) - for all business. Perhaps, the drop in tax revenue from allowing capital expenses to be deducted, would be a better option than a reduction in business tax rates.

Iain Phillips - 17-Oct-2009 06:17 PM

You do not include rental or investment income in your proposal. Why not? There is a compliance burden on investors too (albeit small). This results in far too much time and effort being spent by investors and their accountants on tax minimisation, rather than seeking high quality investment strategies.
The government recently took a step in the right direction with the introduction of PIEs. PIE investment income is taxed at its own rate, and does not count towards an individual’s income tax liability. Why not take this one step further and separate all personal investment income into a separate class?
Here are some ideas:
1. Change RWT on interest and dividends to a flat rate of 19.5 or 30% and make it a final tax (this brings all bank deposits and private shareholdings in line with PIEs and will encourage saving in the same manner that PIE schemes are intended to).
2. Apply a similar final tax to gross income from residential investment properties at a flat tax rate (say 20%) and allow no deductions. The low rate reflects the fact that no deductions are allowed, and should be based on the owner of an investment property paying roughly the same amount of tax as if the money was invested in the bank or a PIE.
This would be much simpler to administer than either the current system or the Risk Free Return tax which has been discussed recently, with no requirement to value the property to work out the amount of equity. It may also help meet some other government objectives such as improving savings rates and housing affordability. With no deductions allowed, the ability for ‘investors’ to make consistent losses to offset their high incomes in the hope of future tax free capital gains is removed. Since no deductions for financing costs are allowed, the focus should return to obtaining a reasonable after-tax yield, rather than seeking highly leveraged loss making properties.
Of course this need only apply to ordinary ‘Mum and Dad’ investors. Larger investors that build a business around property investment could elect to operate under the small business taxation model instead. Electing to do so would enable deductions to be claimed for expenses incurred in earning the rental income (including financing costs), but would also require such businesses to account for income from realised capital gains.
You could even take this a step further and require that all tenants pay rent directly to Tenancy NZ. They would then deduct tax before passing it onto landlords. A typical small investor like myself would meet all other tax liabilities via PAYE on my salary and RWT, with no need for an end of year ‘square up’ and no requirement to file a tax return.

Stephen Lace - 17-Oct-2009 03:20 PM

Hello, I'm very keen to see simplification of the tax system I am however a bit bemused wondering how some of the changes proposed such as no longer requiring a stock take will relate to the need for all business to be able to accurately chart financial performance.

Questions also arise as to how accountants are meant to reconcile such simplification with accounting standards and in particular for Companies, how companies law will be amended. We need to remember that growing businesses , (and we surely need them to grow) requiring finance etc can keep financiers informed with financial statements made too simple.

The result may be that the process of constructing a tax reconciliation to take advantage of the simplification measures will take up much of the time otherwise intended to be saved.

Certainly the removal of FBT for smaller businesses will assist with the removal of anomalies such as the silly exposure of companies to FBT over vehicle ownership whilst partnerships and sole traders are able to apportion costs in a more sensible fashion.

I have not had time to read the report at this stage (and may not have time to) but these are my initial comments.

These comments for the policy makers , not intended for publication please.

Justin Cunningham - 15-Oct-2009 10:04 AM

Wow- the most realistic idea for small business that I have seen tabled. Its dealing with the majority, its easy to understand, its fair and for businesses just starting our its a good tax rate to incentivize giving it a go.

Congratulations, and I would like to pledge my support in any way possible.

Justin Cunningham
Owner
Freedom Coaching

Pat Sowden - 15-Oct-2009 09:31 AM

Your proposal would bankrupt most small retailers whose gross profit is less than the combined total of taxes in your proposal.
GST-12.5 % + turnover tax -15%= 27.5% of gross.Average margin=25%. Even highly aid accountants should be able to figure that out.

Karl Rohde - 14-Oct-2009 08:54 AM

These are amazing ideas. As a long term self employed person, the biggest struggle has always been tax compliance.

Systems as proposed here would reduce not only compliance costs for the businesses, but would be relatively easy to implement from an IT perspective as they are essentially an extension to the GST systems.

Lets hope someone in the government finally actually listens.