'PAYE' plan for company tax
The way businesses, investors and the self-employed pay tax could change dramatically after the Inland Revenue Department completes a $1 billion-plus overhaul of the tax system.
A discussion paper released by Revenue Minister Todd McClay and Finance Minister Bill English proposes a smaller role for the much hated "provisional tax" system which forces businesses to guess, and pay tax on, their future income.
Most company tax could instead be collected through the year through what Inland Revenue described as something "akin to a PAYE" (pay-as-you earn) regime for business profits.
READ MORE: Tax changes to affect everyone
In a similar vein, payments to contractors and the self-employed, including migrant workers, would more commonly be taxed at source, rather than paid tax-free.
Inland Revenue said that under the current system, migrant workers could work tax-free in New Zealand for up to two years by setting up companies and contracting out their services to employers, before skipping the country.
The changes do not end there.
Businesses send an "employer monthly schedule" to Inland Revenue each month detailing how much staff have earned and how much tax they have deducted. Inland Revenue said the system was largely "paper based" but in future the same information could be sent to Inland Revenue automatically from businesses' accounting software, such as Xero and MYOB.
Similar changes could be made to GST returns.
PWC tax partner Geof Nightingale said the proposals were "fundamental and ambitious".
The changes would be really significant, especially for small businesses because compliance costs fell disproportionately on them, he said.
"If the Government gets it right, this will save costs and time for businesses. In the shorter term, over two to three years, there will be a cost in coping with change.
"I think they have got a significant challenge redesigning the tax system while they keep the old one operating. But I can see where they are trying to go and it makes sense to me."
Inland Revenue said it could tell banks and listed companies how much tax they should deduct from people's interest and dividend payments through the year, rather than largely relying on individual investors doing that themselves.
People's privacy would need to be considered as more organisations would have information about people's tax bands, but McClay said that might just be a case of a "computer talking to a computer".
Taxes on savings and investments would become more important to Inland Revenue as the population aged and at the moment it did not have good information on people's investment income, the department said.
WHAT COULD CHANGE
Now: Most wage earners only need to request a personal tax summary at the end of the financial year if they earned more than $48,000 and received more than $200 of interest income taxed at less than 33 per cent.
In future: Everybody would get an annual online statement that they would need to check to ensure they had paid tax on all their income.
PAYE and GST
Now: Businesses send information on what staff have been paid and taxed, and how much GST they have collected, once a month, usually by rekeying that information or sending in paper forms.
In future: The same information would be automatically sent where possible from companies' accounting software systems, reducing errors.
Now: Businesses that have tax bills of more than $2500 at the end of the year have to pay a portion of their next year's tax in advance through "provisional tax". That means they have to guess their future income and they face penalties if they get that wrong.
In future: Company tax could be collected through the year, with the calculation based on a percentage of their month revenue or a simplified assessment of their accounting profits.
Contractors and self-employed
Now: Companies need to deduct withholding tax at different rates from payments made to an eclectic list of contractors, such as labourers, farm workers, fishermen, freelance journalists, models and apprentice jockeys.
In future: The range of situations in which withholding tax would be deducted would increase, to encompass, for example, migrant workers.
Interest and dividends
Now: Investors tell financial institutions the rate at which they should deduct tax from the likes of interest payments.
In future: Banks and companies that paid dividends to investors would get that information direct from Inland Revenue. Like many of the changes proposed in the green paper, that would reduce the chance of people dodging tax or building up tax debts but would mean tax deductions could change without warning during the year.