Taxing tussle for votes

By VERNON SMALL

The Government is examining how to simplify the tax system for small businesses, including a radical review of how they calculate tax, in a move seen as an attempt to blunt National's appeal in the sector.

The Opposition on Monday unveiled its economic policy, promising cuts to the company tax rate and the top personal rate in its next term in office.

It would also review laws adding to small business compliance costs and would look at exemptions for the smallest firms.

But in mid-March the Treasury and Inland Revenue began work on a "possible package of simplification measures aimed at small to medium enterprises" including ways to reduce compliance costs.

Documents released to the Herald under the Official Information Act show officials have been told to examine adopting cash-flow tax accounting for SMEs.

"If feasible, this approach would result in considerable simplification of tax treatment of SMEs, although the likelihood of a very high fiscal cost of this approach may outweigh benefits," the departments noted.

A spokeswoman for Finance Minister Michael Cullen said no estimate had yet been made of the likely loss of revenue to the Government from such a move.

PricewaterhouseCoopers tax partner John Shewan said the change would mean businesses paid tax on their net cashflow at the end of a month. So tax would be paid only when they had received the cash.

"At the moment a number of small businesses find that they have accounting profits but not big cash in the bank to pay the resulting tax."

Under the existing accrual system businesses are required to account for goods sold but not yet paid for.

Shewan said that if most small business qualified it could cost the Government several hundreds of millions of dollars.

"It's good and healthy that all these things are looked at. The problem is every time these things are looked at it seems to end up in the too-hard basket."

The Government also plans to review tax simplification measures introduced in Australia, study the life-cycle of small businesses, and analyse the types of entities businesses use - trusts, companies and partnerships - to see if they are "appropriate".

Officials will report their findings in August.

National believes its planned tax reductions would allow small business to grow faster, finance spokesman David Carter said.

Lowering tax on personal income over $60,000 from 39 per cent would help small businesses because many are not companies.

Many preferred paying the higher personal tax than meeting the extra costs of forming themselves into a company to qualify for the lower company rate of 33 per cent.

National would lower company tax to 28 per cent in its first three years.

National's revenue spokeswoman, Annabel Young, estimates less than one-third of businesses are companies.

Labour and National's focus on small businesses reflects their importance to the New Zealand economy.

Surveys suggest about 85 per cent of firms have fewer than five employees - a total of 197,000 firms employing 319,000 people out of a total of 1.38 million employees.