Accruals rules are cruel to small business owners.
How many of you have paid tax on money you have earned but never received?
I can say most of you have paid tax on money not yet banked, especially in your March 31 financial statements.
Think about end of year debtors' adjustments or accounts receivable. Who will you still be waiting for money from at the end of next month?
It is a strange thing to know that we are assessed for tax on money that we may never bank.
You can't even go back into your previously filed tax returns to take out those bad debts to reduce your tax liability. If you don't write them off and cease collection before the end of March, then they can't be adjusted for, until the following tax year.
Does that sound like a fair tax system?
Dunn and Bradstreet have released information showing that business payment times have fallen from 44 to 40 days in the December quarter, and that cashflow cycles are continuing to firm up.
So does that help with our taxes? Perhaps not in the calculation of them. It gives us some confidence we will be paid sooner and it certainly means businesses are more likely to pay taxes on time and may have some cash banked sooner to reinvest and hire.
Matching revenue earned with expenses incurred is a rule our tax system currently uses. But why do we continue to entertain such ancient methods of accounting for income tax purposes? We may need to change its name from income tax to cash-banked tax, but calculating tax based on a cash basis is something to consider.
We have the option to pay GST using the cash payments method. And, in the 2008-2009 tax year, IRD introduced the ratio option for tax payments, thus aligning provisional tax with cashflow and which bases provisional tax payments on a percentage of sales.
With business lending, banks will look at profit and loss statements to ensure a level of profitability, but will generally follow up with a request for a cashflow forecast. The ability to repay a loan and meet payments on time needs be proved.
And what about employees, who don't have to worry about accruals? They pay tax on what they're paid. There's no tax paid in advance on accrued holiday pay or sick leave.
Simplifying tax need not be a complicated thing. If cash truly is king, and 80 per cent of businesses fail because of cashflow issues, then maybe adopting a cash-based tax system will help bring the importance of cashflow and tax the attention they deserve.