Home Featured Government announces tax reforms

Issue 53 - June 2016

Government announces tax reforms

20 May 2016, Featured, Industry Updates

SMEs could opt for pay-as-you-go option over provisional tax

Prime minister John Key’s announcement of a SME-friendly tax package could make life a lot easier for businesses across the country.

In a pre-budget speech at a Business New Zealand event, Mr Key said it’s widely acknowledged that meeting tax obligations is a challenge for smaller businesses.

“This package would make paying tax easier and more certain, reduce the burden of interest and penalties, and help smaller businesses tailor payments to their own circumstances,” he said.

The proposal includes the following key measures:

  • Reform provisional tax, with a new ‘pay-as-you-go’ option from 1 April 2018 giving up to 110,000 small businesses a way to pay tax as they earn income.
  • 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, (though a minimum 10% rate will apply).
  • The ongoing 1% monthly penalty to be scrapped from 1 April 2017 for new debt – although immediate penalties and interest charges for late payments will continue to apply.

The pay-as-you-go option only applies to businesses with a turnover of less than $5 million. To use the regime, businesses will need to use a cloud-based accounting system that is linked to the Inland Revenue Department allowing two-monthly calculations, which would align with GST payments.

The changes are being delayed until 2018 when the IRD’s new computer system will be up and running.

Mr Key said that the changes to the withholding tax rules will make the system more flexible.

“Contractors will be able to choose their own withholding rate, subject to a 10% minimum. This means contractors can take into account their own individual circumstances,” he said.

“If an accurate rate is chosen, contractors may no longer be forced into an ‘over-withholding’ or an ‘under-withholding’ situation that could see them liable for provisional tax. It’s in their interest to get it right.”

Popular with business owners The proposal should be popular with business owners, according to MYOB’s business monitor released in August last year.

More than 1,000 businesses were included in the monitor. When asked what policies they would be for or against, 81% were in favour of policies that significantly simplify tax rules and make meeting tax obligations easier.

Asked whether they would vote for an optional ‘pay-as-you-earn’ system as an alternative to provisional tax, 67% said they would.


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