Making Tax Easier for Small Business
Ideas to make tax easier for small businesses are the subject of a recent discussion paper
("Making Tax Easier for Small businesses" [789K PDF]). The focus of tax simplification for small to medium-sized businesses in this discussion paper reflects the importance of the sector to New Zealand. Small businesses form a more significant part of the economy in New Zealand than they do in other OECD countries. New Zealand averages around six employees per firm, whereas most other OECD countries average from ten to twenty employees. In 2000 there were nearly half a million businesses in New Zealand, 86 percent of which employed five or fewer staff.
Small businesses are important not only in number but also in the extent of their tax contribution. Self-employed individuals who work on their own and businesses that employ five or fewer staff contribute around 40 percent of business income tax revenue. Most of the remainder comes from a small number of large businesses.
Because they are smallish in size, however, these businesses tend to be disproportionately effected by tax costs. Many owners do the paperwork themselves, outside business hours. The proposals outlined in this discussion paper are designed to remove some of the tax compliance burden for these businesses.
Summary of Proposals
Covering part of the cost of using payroll agents
- The government would cover part of the costs that small employers incur when they use a payroll agent to take over their PAYE and other government-imposed payroll obligations. The subsidy could apply to as many as five employees per business.
- The government would contract with payroll agents and pay the subsidy directly to those agents.
- Government departments would interact directly with an employer's payroll agent rather than the employer, thus freeing the employer to spend more time on business while giving the employer access to specialist payroll resources.
- Payroll agents would largely be paid by the government to help small employers with their PAYE and other governmental obligations.
- Employers could still choose whether to use a payroll agent or do the work themselves.
Improving the timing and frequency of tax payments
- GST and provisional tax due dates would be standardised, payable on the 28th of the month.
- Provisional tax would be paid with GST, which for many businesses would mean more frequent but smaller provisional tax payments.
- PAYE and terminal tax payment dates would remain the same.
Provisional tax based on GST turnover
- Provisional tax would be based on a ratio of a taxpayer's two-monthly GST-adjusted sales. It would be a voluntary option.
- GST-registered taxpayers with turnover of less than $1.3 million could qualify for this option. They would have to pay both GST and provisional tax in their own right to qualify.
- Provisional tax would be paid along with GST (two-monthly or six-monthly).
- Businesses that adopted this method would not be subject to use-of-money interest.
A discount for individuals starting a business
- Self-employed people would be given an incentive to pay tax in their first year of business. It would take the form of a 6.7 percent discount against their end-of-year tax liability for each dollar of tax paid during the first year.
- The discount would apply to individual taxpayers in the year before they are required to pay provisional tax.
- They would receive the discount only once and their entitlement to it would lapse once they became a regular provisional taxpayer.
- Individuals who started a business would be able to choose whether or not to receive the discount and in which year to receive it.
- The discount would be 6.7 percent of the lesser of the amount paid during the year or 105 percent of the end-of-year residual income tax liability.
Electronic tools to answer questions on employment and residence status
- Inland Revenue would provide on-line tools to clarify employment and resident status, which would reduce compliance costs for employers.
Submissions close on 31 October.
Written submissions should be addressed to:
Tax simplification,
C/- General Manager,
Policy Advice Division,
Inland Revenue Department,
PO Box 2198,
Wellington.
If making an electronic submission the electronic address is: policy.webmaster@ird.govt.nz
Contact for Enquiries
Senior Policy Analyst
Sector Performance Policy
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND
Phone: +64 4 894 0684
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