Section Five: Small Business Taxation
Report Section 5 (89 KB)
It is what is says – a small tax, for small businesses.
This section affects the largest number of business owners in New Zealand. Our proposal looks to simplify the relevant taxation by:
- Putting small business on a cash accounting system for income tax
- Merging GST and income tax obligations
- Eliminating FBT and entertainment taxes
- Simplifying deductions such as depreciation
Antony Dean - 29-Mar-2010 05:39 PM 
Payments basis GST and income tax - absolutely YES, especially as payments information can be automated (from banks) and that opens up a lot more doors for compliance cost reductions. As mentioned in my micro business feedback, the execution of the tax system is what has become an unnecessarily complicated mess (provisional tax, depreciation, accruals basis, GST periods, double entry accounting, tax agents - things that have ZERO net effect on actual long-term tax take!). This change is a must-have - accruals accounting is an irrelevance to small businesses.
2-monthly adjustments for depreciation, interest etc - absolutely NOT! This would create an untenable hike in compliance costs (unless completely automated). Something that is now "done by the accountant" at end of year becomes the job of the business owner to repeatedly bring to the top of their mind every 2 months! (Or worse, have to pay the accountant to do.) Basically an impossibility. Presumably the 6 month option would still apply. Perhaps if the adjustments were voluntary and incomplete until year end. Of course if it were all automated online as part of the tax system (at no cost to the user) then the problem just vanishes, perhaps this is the intention.
Judging turnover is a little unfair: I on-supply parts with my services at-cost (so it can be client's risk), sometimes creating a large apparent turnover of paper transactions that would have to be avoided or hidden to get around the classification rules (not that I turn over anywhere near the threshold).
I like the 40% buffer idea, but again it creates the opportunity for unfairness.
Variable rate company taxation is very attractive, but very questionable: Natural people are expected to have a regular, day-job income, hence the tiered tax rates. Small and micro businesses can swing between significant profit and loss year after year - sometimes just a paper illusion, depending on when customers are billed for major sales (eg large contract jobs) etc, where actual cashflow might be a lot steadier (when it runs out, you start leaning on debtors etc). Joining them at the hip makes some sweeping generalisations about yearly cashflow within small businesses. WINZ also uses shareholder salaries and dividends to calculate benefit abatement, further exposing natural persons to the unavoidable ups and downs of small business. As I said, attractive, but some people and their businesses are going to be left exposed and ruined by this. For most people the "limited liability" aspect of a company is a non-event, so what purpose does a company structure then have if not to allow some arm's length separation? Can't all the same thing be achieved by just not having a company, or providing a new legal entity to do the job proposed?
Trading stock is often difficult to value for small businesses - who often work in the dark and speculatively with their purchases - unable to know at the time of purchase (or 2 months afterwards) whether something is going to be stock, expense, or asset.
I don't like the apparent trade off between simplicity and fairness that arises. It's not some sort of mathematical optimisation or cost-benefit analysis, nor do perceptions of "elegance" have a place. Here lack of simplicity on the most part is due to correctable defects in the system, which have obvious and near trivial solutions at the technical level (although I suspect a practical impossibility due to entrenchment of the "industry", and political opinion). The correct analysis in this case is to "open your eyes to unnecessary, stupid, outdated features of the system".
craig macalister - 08-Dec-2009 11:26 AM 
A short response to Wreck 1080
People can pay GST based on the ratio option. How our proposals (the 1.2m t/o proposal) differs from the ratio option is that you pay income tax every two months and, like GST, that is the end of matters for that period. Whereas with the ratio option (that calculates provisional tax as a percentage of GST output tax) you are still assessed for tax on an annual basis, which means you still face making year end adjustments such as trading stock valuations and accruals for certain prepayments.
Also many small businesses that operate through a company cannot use the ration method because the GST is paid in the company and provisional tax paid in the shareholder's name. Our proposal also deals with that.
Depreciation will simply be a two-monthly calculation. For example, if an asset costs $12,000 and is depreciated at 10%, annual depreciation is $1,200. Under our proposal you would claim $200 every to months. We have proposed that assets (other than buildings) be pooled and depreciated at 20%. A question arises about square ups when an asset is disposed of. The simplest way of dealing with this in our view is to remove the overs and unders square up when the asset is sold.
Again, as with all thinking in the proposal, thoughts and comments are important to gauge the effectiveness of the proposals.
Thanks for your comments.
Craig Mcalister - 08-Dec-2009 09:45 AM
Just a short response to some good observations raised by Tauhei Notts.
The livestock valuation rules cause specific problems because of the significant value of the livestock, the differing classes of livestock and because unlike other forms of trading stock, with livestock we get natural increases. In the paper under Questions and Answers we have attempted to design a method for dealing with livestock that fits with these proposals. We are very interested in how we can make the proposls work for farmers given the number of farmers that could potentially fall into the less than 1.2m t/o proposal. We welcome comments on our thoughts.
The social policy taxes such as child support, student loans and working for families tax credits fit well with these proposals. In relation to the 1.2m t/o proposal, the income is measured every two months. Thus to determine, say, child support, either the percentage to income payable in child support is adjusted to a two-monthly basis (ie: child support is paid as 18% of income up to a fixed amounts, so that could be adjusted to 3% of two months earnings) or the two-monthly earnings figure is annualised, and the child support liabilty calculated paid on that basis. This means that in good periods when income is high, child support liability will be high. However, in an off season when income is low, child support will be correspondingly low. Working for families tax credits will be the same, that is, when income is high, working for familites credits will be low and when income is low working for families credit high. We acknowledge that there are pros and cons here, but measuring liabilities and entitlements on a two-monthly basis (and recalling that income is calculated on a cash basis) may well give a better match. For example, for self-employed, if they get to the end of their year and discover that their income is higher than predicted they may face child support arrears for the past year and then possibly an over payment in any working for families credits received. Under a two-monthly approach, this all goes. The tradeoff is the fact that measuring social policy obligations every two months may give a different outcome than we get for a 12 month period or tax year. But then recall that the measurement of income on a 12 month basis is arbitrary as well. What we are advocating does require a small shift in the old 'annual' paradigm to a two-monthly approach with no annual square up. Again, comment is welcome on this.
Kiwisaver contributions will be calculated as a percentage of the two-monthly earnings or the business can contribute the amount it sees appropriate.
Foreign investment fund income admittedly is a little more difficult because of the basis these rules use to measure FIF income. The proposal in our paper is based on the taxpayer paying tax on a cash basis when they actually have the income coming through the door to settle obligations. Consistently with this approach then people with FIF interests will be exempted from the FIF rules and pay tax on dividend income when it is received. An alternative would be to modify the 5% fair dividend rate FIF method to work on a two-monthly basis. This can be easily achieved, but we prefer the simpler method of returning to paying tax on cash dividends for small tax payers. This point was not discussed int he paper as we wanted to focus on the higher level concepts without getting into too much detail. However, thank you for raising this.
The foreign dividend withholding payment rules are being phased out and replaced by income tax. Under these proposals then, if a company is in receipt of a dividend, the company will pay tax on the dividend when it is received.
Finally you note that tax simplification is an oxymoron. What we are trying to do is find a way of making tax simplification possible. Nothing ventured is nothing gained. Rather than ourselves and others telling Government the problems, with the assistance of the business community we hope to be able to offer Government some solutions.
Thank you for your comments
DP F - 02-Dec-2009 03:22 PM
I'm surprised there hasn't been more comment on this issue. IMO this is the single best chance for us to create meaningful growth and have any chance of catching Australia in economic terms.
There will need to be some strong disincentives to rort the system as I can see "Joe" the part-time property investor bying a house through an LAQC, declaring himself a "small business owner" and lopping even more the tax tree while producing nothing of substance for the country.
I like the idea that the 15% threshold is extended up to $500k of sales, thought this may be too ambitious. To be fair, $500k is still a bit in this country. I think it would probably be better at $250k, rising over time as the economy expands as a result of this forward thinking.
What governments and their advisors seem to lese sight of is that most people spend all they get, so they end up getting 100% on any dollar anyway, simply because it goes through the system so many times. Person generates a product and sells it (pays gst). Person then buys food, petrol, consumer goods (pays GST). Shop owner pays wages to staff who then buy food, petrol, consumer goods (pays gst). And so on and so on...The more people make, the more government makes, which means the more they have to pay out and the wealthier we all are. It's a pretty simple equation and I can't figure why governments go to such great lengths to stuff it up.
DP F - 02-Dec-2009 03:02 PM
It is good to see a professional organisation placing the interests of their clients above their own. I expect that simplification of the Tax System will ulitmately reduce the amount I pay an accountant to deal with the IRD on my behalf. An old client told me that he reckoned government both local and central had an 'avoid simplicity at all costs' policy; currently the available evidence appears to support this theory.
DP F - 02-Dec-2009 02:49 PM
Utterly brilliant idea. A few lessons in there for government departments dealing with owner operators. A few bosses I've known were pretty fed up with the Dept of Statistics questionnaires. Just because it's necessary, it doesn't have to be onerous.
DP F - 02-Dec-2009 02:47 PM 
I could write pages on this but consider a few problems.
How will intricacies of Market Value, National Standard Costs Determination Order and the Herd Scheme affect the farmers who elect to use this system?
They quote the example of Burt the plumber. How will Burt's liability for student loan payments be determined? And his liability for Child Support and his Working for Families income abatement? And his liability for previously overpaid social welfare benefits. How will we calculate Burt's Kiwisaver contributions and the one for one subsidy. Burt's company also has a 100 shares in Oil Search, an Aussie company. Will the company be subject to Foreign Dividend Withholding Tax on the dividends received and/or will that Fair Dividend Rate nightmare rear its ugly head. Burt's Dutch missus has half the shares in the company and she still has a Dutch whole of life policy. I smell Foreign Investment Fund rules that are too tough for me to comprehend. Let's face it; tax simplification is the ultimate oxymoron.
DP F - 02-Dec-2009 02:41 PM
The small business changes confuse me a little. You can already pay your income tax against gst using the ratio option. So, is this just an extension to that?
And how does depreciation work? You still need some adjustments. I'd hate to calculate depreciation on each gst return.
The small business option saves me no time.
DP F - 02-Dec-2009 02:37 PM
I see some merits in the small business proposal, but not sure it reduces complexity as much as desired.
DP F - 02-Dec-2009 02:37 PM
I see some merits in the small business proposal, but not sure it reduces complexity as much as desired.
V. T. - 30-Nov-2009 03:06 PM
The merging of business owners' entities with that of the company for tax purposes is a good idea - it will simplify things. There are processes in place now to ensure this, in a roundabout way, but it is quite confusing as you know.
The assumption is made that a small business usually only has two shareholders employed fulltime. Thus, the tax thresholds are doubled.
If there are more than two shareholders then the company will be taxed excessively.
I'm not sure how this works when the shareholders are already drawing a salary - I assume it would be treated as drawings instead.
Good to see the axing of FBT and entertainment taxes for this size business - effectively wages/profits.
GST and income tax calculated on a Cash Basis is fine for smaller businesses and is more favourable for cashflow.
Larger "small" business would/should be maintaining their accounts on and Invoice/Accrual basis. Reconciling back to a Cash Basis is time consuming.
Perhaps the threshold should be lower, a company with a turnover of $1.2M would have a lot of transactions - too many for just running a cashbook.
Simplifying the tax rules could lead to business owners becoming complacent in maintaining their accounts accurately. They may be less likely to monitor the performance of their business.
While it is important to reduce compliance costs, businesses will not want to wind up paying more tax. Hope these comments are of some assistance.
Paul Dawson - 26-Nov-2009 02:11 PM 
I think is is a good move to simplify the tax regime for small businesses and reduce the compliance costs. However I do have a concern that by simplifying the requirements, businesses will spend even less time managing their finances when overall those skills are already badly lacking in most small businesses. If the simplification of the tax rules is also supported by education on financial management and helping small businesses seek the support they need then it could help, but on the other hand it could also send a lot more businesses out of business, if not handled carefully.
Irmelin Lee - 20-Oct-2009 09:34 PM
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Paul King - 14-Oct-2009 05:33 PM
I think this makes a whole lot of sense.
george wilkinson - 14-Oct-2009 05:11 PM
The only part that has appeal is allowing those who can use the Cash basis for GST to do the same for Income tax.This would save compliance time.
The suggestion that all such entities would have to file returns every 2 months will considerably penalise those who have annual turnover under $500,000 and can file GST 6 monthly.From my experience it takes twice as long to do 6 2-monthly returns as it does to do 2 6-monthly ones.And that will increase with the adjustments necessary to give an Income figure.One hour per month is dreaming!
Treating all entities as if they are individuals will be popular with Government as it will increase the base tax,probably more than the fringe savings mentioned.Rogernomics flat tax rate is much preferable.
Corrie Pickering - 14-Oct-2009 12:44 PM
I like the idea of all this. Provisional tax seems to do nothing but create headaches and moving to a cash basis allows for better matching of tax payment to cash generation - more tax to pay when you actually have the cash and less to pay when you have a tough time. Combined with rolling multiple taxes into one flat rate and paying one tax is a big plus in my book.
Corrie Pickering - 14-Oct-2009 12:44 PM
I like the idea of all this. Provisional tax seems to do nothing but create headaches and moving to a cash basis allows for better matching of tax payment to cash generation - more tax to pay when you actually have the cash and less to pay when you have a tough time. Combined with rolling multiple taxes into one flat rate and paying one tax is a big plus in my book.
hans - 14-Oct-2009 11:59 AM
this change to a flat tax greatly appreciated. I think overall I am prepared to pay a bit more tax in exchange of less of this immense paperwork for often very small amounts of reimbursement or transactions.
Richard Boon - 13-Oct-2009 07:34 PM
I think the ideas are great - I am no longer self employed but was with a closely held SME retail business for years and would have appreciated the suggested changes.
Only suggestion is that a turnover of $1.2m for "near the hub of the wheel" business like manufacturing would be the equivalent of say $2m for a wholesale / distributor business "mid spoke", and equivalent to $3-4m for a full retail "on the tyre end".
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