SME Taxation

The NZ Institute of Chartered Accountants (and Tax Mgmt NZ Ltd) has produced a report recommending a major simplification of taxation for micro and small businesses.

Their goal is for a small business to only have to spend one hour a month filing a single tax return.

For micro-businesses (defined as earning under $60,000 with no employees except owner), they propose that they simply pay 15% of their turnover as taxation (incl ACC levies).  This means no having to work out exact expenses (estimated to be 50% of turnover). It will also make it easier to collect tax on cash income.

The tax would be payable to IRD at least annually but more often if desired. An option to would be to designate to a bank your work account and have the bank automatically transfer 15% of all deposits to the IRD so you can’t spend it and get into arrears.

A small business is defined as turnover less than $1.2 million, registered for GST. Their proposal is to eliminate the need to monitor dividends and salaries to owners, and an imputation credit account. The business simply pays income tax alongside GST at the rate the owners are liable for.

Also no provisional tax, FBT or entertainment tax, and trading stock is dealth with on a cash basis, so no stocktakes.

These changes could affect many businesses. 90% have less than five employees and two thirds of those are run by owner operators.

NZICA make the point that the corner dairy faces the same rules as the largest corporates. Some will argue that is a good thing, but the compliance costs are considerable.

They propose both models be opt-in, so businesses could continue with the status quo if they wanted to.

You can provide feedback at www.smetax.co.nz.

I like the micro-business proposal especially. It really would only apply to people starting their business up, but that is when you want things to be simple.

I see some merits in the small business proposal, but not sure it reduces complexity as much as desired.