Labour's tax policy a breath of fresh air

Taxing Times is a weekly column that looks at various aspects of tax and money management.
Taxing Times is a weekly column that looks at various aspects of tax and money management.

In the run-up to election 2014, political parties are busy hoisting various policies up the flagpole to try to attract voter attention.

Many of these policies involve tax, and range from the very poorly thought-through policies, such as removing GST off things mum and dad put in their shopping trolley, inheritance taxes and tax discounts for establishing factories and businesses in rural areas, to the more populist capital gains taxes.

Indeed, it seems these days everyone has a view about what the tax system should and should not do. Health professionals maintain that we should use taxes to reduce sugar intake, anti-tobacco campaigners believe more tax is the answer, as do people who believe we should use tax as a tool to dampen the property market and constrain trading in the New Zealand dollar, and recently, Local Government New Zealand calling for local bodies to have power to introduce separate local body taxation such as payroll taxes.

On the other side of the ledger, in my previous article, I wrote about calls made to lower taxes on retirement savings made by the Financial Services Council, which represents the life insurance and investment savings industry.

So it was a breath of fresh air to read the detail of the Labour Party tax policy recently, aimed at simplifying taxes for small business New Zealand. Unfortunately, mainstream media didn't pick it up - which is disappointing as this is something even journalists would understand.

The main thrust of the proposal for small business is to file no more than one tax return and one tax payment per month for GST and income tax compliance. The centrepiece of the tax proposal is that small businesses registered for GST will use GST rules and returns to also calculate and pay their income tax.

This is premised on the basis that, fundamentally, GST and income tax are similar in design - they just use different labels. That is, in the GST world we pay GST output tax on our sales and deduct GST input tax on our expenses to arrive at GST payable. In the income tax world, we pay income tax on sales and deduct expenses to arrive at taxable income. Thus, by aligning the income tax rules with the GST rules for small businesses, they can calculate and pay their income tax on their two-monthly GST return form.

Because income tax is then paid every two months, a significant advantage is that it does away with provisional tax and year end tax returns. Further, the time taken to complete the combined GST and income tax return is much the same as just completing the standard GST return.

However, interestingly, while main stream media seemed to show little interest in this, the Employers and Manufacturers Association did, and in a press release said that "The stated aim for a small business to lodge one tax return and one tax payment each month for income tax and GST compliance is laudable."

The geneses of labour's small business tax proposal was a discussion paper on small business taxation published by the New Zealand Institute of Chartered Accountants in 2009 and finalised in 2011. Ironically, both the then ministers of finance and revenue in the current government expressed support for the ideas in the paper, but let the opportunity for some fresh thinking on simplification for small business slip by.

Craig Macalister is the tax principal at accounting firm Crowe Horwath. He can be contacted on (03) 211 3355.

The Southland Times