OPINION: The New Zealand Institute of Chartered Accountants released a think piece in 2012 on the taxation of micro and small businesses that shows a "think outside the square" approach.
With tax compliance costs being the No 1 compliance cost burden for small businesses, and the well- known fact that small businesses shoulder a disproportionately higher compliance cost burden than larger firms, the paper was trying to find a means of resolving the predicament. The proposals encountered opposition within the accounting profession as they signalled the end of year-end accounts for tax purposes, and tax policy officials at the Inland Revenue Department and Treasury, who only know how to complicate tax laws, kicked the proposals into the too-hard basket.
So what are they? The proposals are two-fold: A micro business proposal for startups and fledgling businesses with turnover below the GST threshold ($60,000), with no employees; and a small business proposal for businesses with turnover less than $600,000.
Micro business proposal
The micro business proposal covers income tax and ACC liabilities on self-employed/ business earnings.
A final income tax and ACC rate of 14 per cent on turnover for all businesses, except for people principally dealing in goods, who would pay 7 per cent.
Tax payments made monthly.
No tax return filing.
Income will be transferred to the taxpayer's summary of earnings and no further income tax on this business income will be payable.
Small business proposal
The small business proposal is the centrepiece of two proposals. They recognise that income tax and GST calculations are similar at their core in that both tax incoming receipts and allow deductions for expenditure. The proposal is that these calculations be aligned. By aligning income tax and GST, small business taxpayers will calculate both income tax and GST at the same time on the same form. The main exception to full alignment is interest and wages that have no GST content. The proposal is that these costs remain deductible when calculating income for tax purposes. Thus, when aligned:
Income tax is paid on the GST return on a cash payments and receipts basis using the same rules for calculating GST, but allowing interest and wage costs.
Like GST, income tax will be paid two-monthly with no year- end square up.
Small businesses that trade through a company will be taxed analogously to a sole trader - that is, tax levied at personal tax rates with private expenditure not deductible. This would mean:
No annual income tax return and year-end square ups, such as stock takes.
No provisional tax, fringe benefit tax, or entertainment tax.
All costs (excluding land) will be deductible in the same way as GST, but likewise all sale proceeds are taxable. This does away with depreciation.
Income tax would be a final tax in the same way as GST and, once paid, income can be distributed tax-free.
The current tax compliance cost burden falls disproportionally on small businesses. While the irony of taxation is that finding simple solutions can represent the hardest of problems, the proposals show what can be achieved with a fresh sheet of paper and a willingness to think outside the square. Small business simplification adds to productivity and is a challenge that should not be left in the too-hard basket.
» Craig Macalister is tax principal at accounting firm Crowe Horwath. Phone (03) 211 3355.
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