Ding dong the provisional tax is dead

The Government has announced a tax reform package for small businesses:

• Provisional tax is being reformed, with a new pay-as-you-go option giving up to 110,000 small businesses a way to pay tax as they earn income from 1 April 2018.
• Use-of-money interest will be eliminated or reduced for the vast majority of taxpayers.
• Contractors will be able to choose a withholding tax rate that suits their needs, rather than one being set for them.
• The ongoing 1 per cent monthly penalty will be scrapped from 1 April 2017 for new debt – although immediate penalties and interest charges for late payments will continue to apply.

Like most small business owners, I dislike provisional tax. Your provisional tax is calculated on your previous year, and if you have a better year than expected, then you get whacked with penalty interest for not having paid enough provisional tax earlier in the year.

A pay as you go option is a great idea, and very easy to do with modern accounting software.

“Around 30 to 40 per cent of businesses currently use cloud-based accounting software. This is expected to grow to 85 to 90 per cent in the next 10 years.

“This package allows small businesses to pay provisional tax through their accounting software, rather than having a separate process for their taxes.

“Small businesses are the backbone of the New Zealand economy. We want to help them spend more time focused on their business, not their taxes.”

The package is expected to cost $187 million over four years.

This move will be very popular with small business owners.