Newcomers get a tax break

By ELLEN READ

Up to 17,000 taxpayers a year could save $3.6 million under Government plans to help small businesses.

Legislation giving the self-employed a discount on provisional tax paid in the first year of business will be introduced to Parliament within a few weeks.

Mooted in last September's "making tax easier for small businesses" Government discussion paper, the new law is expected to take effect from April 1 next year.

It will give a 6.7 per cent discount on voluntary provisional tax payments made by self-employed people and individuals who receive income from partnerships during their first year of business.

"Businesses do not have to pay tax on income earned during their first year until the second year, but both year's payments can be due about the same time - which can be a real financial knock-back for some small businesses," said Associate Finance Minister David Cunliffe.

The discount will not affect the Government's tax income, as it will receive interest on the tax money it collects early.

Heather Douglas from Home Business New Zealand said the scheme would help reduce risk for new ventures.

"For the majority, [tax] has a major impact on their cashflow and ability to survive, let alone thrive.

"Having an option of earlier payment allows home businesses to take advantage of a discount but also encourages them to spread their tax payments and preserve their cashflow, making their businesses less vulnerable to other factors."

Business owners should save money to pay their provisional tax, but many were squeezed to make ends meet or found budgeting difficult, Douglas said. Second-year business operators often hit the "double whammy" of two years of tax payments falling due simultaneously.

More ideas from the discussion document are expected to make it into legislation this year.

They include proposals to align provisional tax and GST payments, let small businesses base provisional tax payments on GST turnover and help them with PAYE - often top on the list of small business tax complaints.

"Each of the proposals has been the result of extensive consultation with small businesses about ways to make tax easier for them and to reduce the associated compliance costs," Cunliffe said.

"The small business sector is a key driver of growth in our economy but many struggle to make it past the first couple of years.

"We want to give a hand up based on clear need."

The IRD says potential savings of $3.6 million are available to the 17,000 new businesses created annually, based on previous years' tax returns.

Self-employed Auckland woman Bev Isbill thinks the Government's offer is great news for new small businesses.

She runs a fashion consultancy and homestay retreat from her Titirangi home and says that when she set up her company she had a business partner who took care of the financial details with the help of an accountant.

"If I'd been setting up on my own this would have been very helpful - anything to save money," Isbill said.

Most businesses did not make much money in their first year, and any profits were usually ploughed back into the business, so any measure which saved a few dollars was welcome, she said.

Staples Rodway senior tax partner Roger Thompson said the scheme sounds like a good idea.

He many business had trouble passing two lots of tax in their second year because they had used money to expand the company instead of putting it away to pay tax.

He said 6.7 per cent was a reasonable discount compared with putting the money in the bank to earn interest.

"It's probably a little bit lower than you'd be paying on your mortgage but a little bit higher than you'd get if you put your money in the bank."

Provisional tax is the same as personal income tax - 19.5 per cent up to $38,000 of earnings, 33 per cent over $38,000, and up to $60,000 and 39 per cent on earnings above that.

The 33 per cent rate applies to incomes over $38,000, and up to $60,000.


A self employed person earning $38,000 would pay $7410 a year tax without the discount and $6913.53 after taking 6.7 per cent off - a $494.47 saving.

For income of $60,000, the discount is $982.89 reducing tax paid to $13,687.11 from $14,670.

"It is a decent discount, probably quite a useful thing for people to take advantage of," Thompson said.

"You're only going to get it in your first year of business, but I think it's a good idea to encourage people to pay their tax early to avoid having a double-whammy in their second year."

The scheme

* Open to the self-employed in first year of business.

* Gives a discount of 6.7 per cent on provisional tax paid during first year.

* A person earning $60,000 could save $982.89.

* Starts in April next year.