Proposals to Simplify Business Tax - April 2016

With more and more SME's moving to cloud-based accounting packages, the Government is embracing this technology and will be allowing taxpayers to pay taxes, such as provisional tax and GST, directly to the IRD via these accounting packages.  Now that's got to be good news surely.

The proposal that everyone seems to be getting excited about is the new provisional tax method.  This method is the Accounting Income method and is an optional method which will allow taxpayers, who have a turnover of less than $5m, to have their accounting software calculate their provisional tax for them.

This calculation is based on the last two month's accounting results with payment then being made via the accounting software straight to IRD at the same time as GST is due. 

Essentially this is a 'pay-as-you-go' method, similar to the infrequently used GST-ratio method.   In fact, if the GST-ratio method take-up is anything to go by, the accounting income method may become the exception rather than the norm.

The advantages of the accounting income method are that taxpayers will not be charged use of money interest so long as they pay each instalment on time, and potentially taxpayers may be entitled to receive a refund of overpaid tax during the year.  However, given the other changes being proposed to the use of money interest rules, these advantages may not be enough of a drawcard.

One of these changes is the proposal to remove use of money interest from the first and second instalments of provisional tax for taxpayers who pay based on the standard uplift method.  Currently interest applies from the first instalment if the taxpayer is above the safe-harbour threshold.

The other change is the proposal to increase the safe-harbour threshold to $60,000 for all taxpayers.  This is up from the $50,000 threshold which is currently only available to individual taxpayers.

With these two changes, continuing to use the standard uplift method is definitely a viable option.  The standard uplift method means taxpayers only need to bother themselves with provisional tax three times a year, compared with every two months under the accounting income method.  And with the third instalment being due at least 4 weeks after year end, taxpayers will generally have a fair idea of their likely tax liability for the year and can make the appropriate payment by the third instalment date.

For many of our clients, tax pooling through the use of a tax intermediary is how they address their provisional tax issues; and we don't see the introduction of the new accounting income method changing this.  Taxpayers tend to opt for the lowest cost and greatest flexibility which is what tax pooling generally provides.

It's concerning to see that the proposals don't allow tax pooling to be available for those taxpayers who opt to use the accounting income method.  This would be an issue for taxpayers who dutifully pay tax every two months in line with their accounting software, but due to cash flow issues may not be able to meet a tax payment on a particular date.  To not be able to use tax pooling and to then be subject to interest from the missed payment date is bound to leave a bitter taste in taxpayers' mouths.

It is the fact that the new method calculates provisional tax based on accounting results which is causing the most concern to us.  Tax is based on tax results, not accounting results.  Unless you are having your accountant run their eye over your transactions every two-months and process the relevant tax adjustments, the instalments you make under the accounting income method will not equate to what your end of year tax bill is, as is often the case with foreign exchange fluctuations.  As a result, if you pay too much, you won't receive any interest on your overpaid tax and if you miss a payment, you will be exposed to use of money interest as you can't use tax pooling. 

The use of the accounting income method is highly reliant on the quality of the data being entered into the system.  The risk is if taxpayers are not overly engaged with their accounting system then the information will not be accurate and up to date and taxpayers could find themselves overpaying their tax throughout the year. 

The new accounting income method should therefore encourage taxpayers to engage with their accountants or tax advisors more regularly than just at year end and perhaps the three instalment dates under the current provisional tax methods.  In fact, the IRD will impose shortfall penalties of 20% if reasonable care has not been taken in calculating the provisional tax payments under the accounting income method.

It is early days, and these proposals may well change, but as yet I'm not convinced the accounting income method will be in the best interest of many of my clients.

Moving on from the new provisional tax method, other proposals that will benefit taxpayers include:

• Removal of the 1% incremental monthly late payment penalty
• Companies can pay tax on behalf of shareholders meaning shareholder-employees may no longer need to be in the provisional tax system.

• Contractors can elect their own withholding tax rate, with the minimum being 10%.

• FBT for close companies will be simplified

• Increasing the thresholds for GST, FBT and income tax adjustments in subsequent returns from $500 to $1,000

• RWT exemption certificates will no longer need to be renewed annually

These are just proposals and interested parties have until 30 May 2016 to make submissions which means the proposals could change, but the way they stand now they will either come into force 1 April 2017 or 1 April 2018 for the UOMI changes.

We will cover the detail of the changes at CE training once the proposals are closer to being finalised.

In the meantime, for those wanting more detail on the proposals, a lengthy Official's Issues Paper is available on the Tax Policy website http://taxpolicy.ird.govt.nz/publications/2016-ip-mts-better-business-tax/overview together with a helpful two-page summary document.

To discuss your clients' provisional tax options and whether the new accounting income method may be right for them, contact the Knowledge Shop Team.