As part of his pre-Budget speech in Wellington today, Prime Minister, John Key, announced a business tax package which “will reduce compliance costs and makes tax simpler for small business”.
Under the new regime, the provisional tax rules for small and medium businesses (with a turnover up to $5 million) will be supplemented with a new pay-as-you-go option. The new option will allow for tax payments on an ongoing basis throughout the year and businesses will be able to make tax payments directly through their accounting system. These rules will apply from 1 April 2018.
Use of money interest (UOMI) will not apply to taxpayers who choose the pay-as-you-go option and who pay tax on time.
For taxpayers who use a standard uplift method, the current “safe harbour” amount of $50,000 residual income tax limit will increase to $60,000 and will apply to non-individuals as well as individual taxpayers (currently this option is only available to individuals).
Another welcome change will be the removal of UOMI for the first two provisional tax payments for all taxpayers who use the standard uplift method.
It is expected that the proposed changes will eliminate UOMI liability for 67,000 provisional taxpayers and a further 19,000 taxpayers will only be liable for UOMI from the last installment date providing that they pay standard uplift provisional tax installments. These new rules will apply from 1 April 2017.
Also from 1 April 201, incremental late payment penalties will no longer be imposed on new GST, provisional tax, income tax and Working for Families Tax Credits (WFFTC) debt. It is expected that under these changes incremental late penalties will no longer be charged on some tax debt affecting 65,000 taxpayers with income tax debt, 67,000 taxpayers with GST debt and 23,000 families with WFFTC debt.
Other announced changes will allow contractors to select their own withholding tax rates – at a minimum of 10 per cent (currently there is a range of varying rates in place depending on the contractor’s activity).
Also, the changes will simplify the FBT rules for close companies and increase the threshold for annual FBT returns from $500k to $1m of PAYE/ESCT and thresholds for adjustments in subsequent returns.
Another welcome proposal is extending the current mileage option for calculating business use for private vehicles so this method can be used regardless of kilometers travelled (the current rules only allow this method to be used for travels up to 5,000 km per annum).
It is also proposed that the 63 days adjustment for employee remunerations will be made optional and as such businesses who see the requirement for the 63 day adjustment as an additional compliance cost may elect to claim the deduction for payments made after the balance date in the following income tax year.
We see the announced adjustments as a way to potentially minimise tax compliance for our clients, however there will undoubtedly be “teething” problems as with many other new regimes.