New Zealand Government Publishes Tax Paper On Small Firms

by Mary Swire, Tax-News.com, Hong Kong

19 September 2003

The New Zealand government earlier this week published a tax discussion document, which contains several new proposals designed to benefit small businesses by simplifying the rules surrounding payment of GST and provisional tax.

The discussion document is based on the findings of market research released last week by Associate Revenue Minister David Cunliffe, which revealed that a large number of small firms would prefer to pay provisional tax and GST at the same time, basing provisional tax on GST revenues.

"Businesses and individuals pay provisional tax in three large instalments during the year, and most pay GST every two or six months," the discussion document revealed. Government research has shown that many small businesses would prefer to pay provisional tax more frequently, to help with their budgeting. One way to make things easier for small businesses would be to align the payment dates of provisional tax and GST. The two taxes would be paid together, on the 28th of the month that payments are due, as follows:

• Businesses that pay GST every two months would pay provisional tax every two months.
• Businesses that pay GST every six months would pay provisional tax every six months.
• Businesses that pay GST monthly would pay provisional tax every two months.
• Businesses and individuals that are not registered for GST and have turnover amounting to more than $1.3 million a year would pay provisional tax every two months.
• Other businesses and individuals that are not registered for GST would pay provisional tax every six months.

The dicussion paper puts forward the idea of providing a subsidy to encourage small businesses to take advantage of the help that payroll agents can give. "This subsidy would pay the agency fees for up to, say, five employees of a small business. The government would pay it directly to the agent."

The government has also proposed basing provisional tax on GST turnover.

For many small businesses, especially those with seasonal income, the main problem with provisional tax is that the three large payments throughout the year do not always match their income flow.

"One solution is for these businesses to base their provisional tax payments on a percentage of their GST turnover, which would be possible if the payment dates for provisional tax and GST were aligned. Their payments could be based on a percentage of GST turnover - a fairly simple procedure. Or they could be based on GST turnover plus other forms of income - a more complex but more accurate procedure," the government suggested.

Measures to help the self-employed include a proposal that will alleviate the burden of paying tax on their first-year income in their second year of business, when they are also paying tax for that year. "This can sometimes be a real financial strain for a new small business," acknowledges the government.

"The idea is to offer a discount of 6.7% for each dollar of tax paid in the first year. The discount would be calculated when the business's end-of-year tax bill is prepared. It could be claimed in a year chosen by the business."

Underlining the importance of small businesses to the New Zealand economy, the NZ Herald reported recently that 97% of the country's firms employ the equivalent of 19 employees or less, whilst 87% have five employees or less.

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