Inland Revenue research suggests that the average self-employed worker hides about 20 per cent of income from the tax man.
They're under-reporting to reduce what they have to pay — and that needs to be addressed, the department says. It's easy to see why this sort of figure causes outrage among the salaried, paying PAYE tax.
Imagine skipping tax on 20 per cent of what you earnt. It would be a big difference. But I don't think it's a fair comparison.
The tax system is rife with inefficiencies and inequity. While some industries have tax breaks — such as farmers, who can defer their income to reduce what they have to pay — others, which are just as needy, subject to seasonal changes and competitive, such as tourism, do not.
There are also the grey areas despite efforts to make tax easier to understand and compliance more straightforward. If we have to determine an interpretation of a section of the income tax act in court how clear does that make our tax system?
In many cases the avoidance is perhaps not even deliberate. They are just confused about which business expenses can be claimed and which cannot. I see these issues and confusion act as deterrents to self employment, especially with penalties.
It's easy to come down hard on the self-employed businesspeople who seem to be taking the IRD for a ride by skimping on tax. But we need to encourage innovation in business. Part of that is taking a risk, putting some of your own assets and money on the line, incurring expenses.
New Zealand needs an environment that can nurture those businesses. More carrot and less stick I say. Ease up on the fear and penalties of self employment, encourage compliance and make it easier to do so.
If the tax system was a little more straightforward, a little more black and white, businesses would spend less time on confusing compliance, the tax department would have to worry less about avoidance, and the economy would benefit.
Jeremy Tauri is an associate at Plus Chartered Accountants.