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Small business taxation: is there a better way: the NZ Institute of Chartered Accountants released its second thought piece on a different way to tax small business last May. Craig Macalister explains its proposals.

The proposals put forward by the NZICA represent a sweeping departure from the existing rules for small business taxation.


The proposals are twofold: a micro business proposal for fledgling businesses below the GST threshold, with no employees and a small business proposal for businesses with a turnover less than $600,000. It would be optional to use these rules.

The micro business proposal could include people who have a small home-based business and people who undertake cash work. It covers both income tax and ACC liabilities on self-employed/business earnings. Specifically:

* A final income tax rate of seven percent will be paid on turnover for people principally in the business of dealing in goods, and 14 percent on turnover for all other business.

* Tax payments made monthly or at any time. No tax return filing.

* The micro tax of seven percent and 14 percent includes ACC levies.

* Income for the purposes of social policy commitments (child support, student loans and working for families tax credits) is 50 percent of gross income.

* The income will be transferred to the taxpayer's summary of earnings and no further income tax on this business income will be payable.

The centrepiece of the proposals is the alignment of income tax with GST, such that income tax is paid two-monthly along with GST. Essentially, income tax calculations are merged with GST: that is, calculated under the same rules and on the same return form. The proposal recognises that income tax and GST calculations are similar at their core in that both tax incoming receipts and allow deductions for outgoing expenditure. They have different labels--but are measuring the same thing. So, when GST is accounted for on a payments basis and income tax is put on a cash basis, the two can be aligned.

However, the proposal also charges tax on the business income at the individual marginal tax rate, even if the entity is a company. This extra step allows income tax to be treated as a final tax in the same way as GST. Thus, the proposal is:

* Income tax is calculated on a cash payments and receipts basis.

* Income tax is paid on the GST return using the same rules for recognising transactions for GST purposes (for example, deductibility, assessability and timing rules follow GST principles).

* Like GST, income tax will be paid two monthly with no year-end square up.

* Small businesses that trade through a company or partnership structure will be taxed analogously to a sole trader: that is, based on the personal marginal tax rate structure with private expenditure not deductible. This would mean:

* No annual income tax return and year-end square-ups, such as stocktakes.

* The capital/revenue boundary disappears as does most black hole expenditure.

* Depreciation calculations are not required as all items (except land) are deductible in the same way as GST.

* Losses can be recognised earlier.

* Provisional tax, FBI and entertainment tax won't apply.

* Dividends and imputation wouldn't feature.

* Shareholder salaries won't be required.

* Alignment with social assistance/child support and student loans obligations would be on a two-monthly cycle instead of annually.

Under the proposals NZICA estimates income tax compliance costs could reduce by a third. However, it means doing away with conventional year-end processes for tax purposes relied on to assess business profitability and performance.

The proposals also give different income measurement outcomes compared with existing standard business tax rules, and thus will give different outcomes for social assistance purposes; which could be a stumbling block from a Government perspective.

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Title Annotation:On Accounts
Author:Macalister, Craig
Publication:NZ Business
Date:Nov 1, 2012
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