Accountants have plan to simplify small business tax

Ian Kuperus of Tax Management New Zealand

With tax reform in the air, the New Zealand Institute of Chartered Accountants has put up a set of proposals to radically simplify the taxation of small businesses.

Tax is their biggest source of compliance costs and NZICA estimates its proposals could reduce them by up to a third.

Some 90 per cent of businesses have fewer than six employees and 60 per cent are run by owner-operators. "Yet our one-size-fits-all tax system design means we tax the corner dairy under the same rules as our largest corporate taxpayers," NZICA says.

In the case of "micro" firms it proposes they pay income tax on their turnover at a 15 per cent rate. That would be the final tax and cover their ACC liabilities as well.

Micro firms are defined as those which have no employees, a turnover under $60,000 and which are not registered for GST.

The 15 per cent rate is based on the rule-of-thumb assumption that such firms spend half their turnover on business-related expenses and the rest is taxed at 30 per cent, which is the company rate. It is a trade-off between precision and simplicity.

NZICA proposes that taxpayers continue to have the right to use the existing rules, which might be attractive if the available deductions were worth more than the time and effort in working them out and claiming them.

The Inland Revenue, on the other hand, might take the view that simplification for small businesses, if optional, would just mean additional complexity for it and its creaky IT systems.

An advantage claimed for this system is that it would reduce the incentive for undeclared cash payments. As a transitional measure, NZICA proposes a 12-month amnesty which would allow people to enter the tax system in this way without repercussions for past years' undeclared earnings from under-the-table payments.

For small, but not micro, businesses it proposes a system where they are taxed on the same base they pay GST on and as if they were sole traders, even if there is a company structure.

This would apply to firms with a turnover of less than $1.2 million a year. Income tax would be paid with the GST return, every two months.

This is possible, NZICA argues, because GST's concepts of output tax and input credits are essentially similar to the income tax system's income and expenses.

The rate would be the proprietor's personal marginal tax rate, or calculated on an income-splitting basis if there were two shareholders.

Eliminated would be the need to pay the proprietor(s) a salary for tax reasons, or provisional tax (since tax would be paid two-monthly anyway) and the complexities of dividends and imputation. But the advantages of limited liability would remain.

It would also simplify cashflow issues around social policy systems administered by the Inland Revenue, notably child support, Working for Families tax credits and student loan repayments.

Ian Kuperus, managing director of Tax Management New Zealand and a member of NZICA's national tax committee, said people could read the proposals and have their say on a website set up for the purpose: www.smetax.co.nz

"We will be seeking feedback from policymakers, small business owners and accountants, in order to create a final all-encompassing report for Government."

WISHLIST
* Micro businesses, such as owner operators, pay 15 per cent income tax on turnover.
* For slightly larger businesses, pay tax on same base they pay GST on and as if they were sole traders.