Looming tax report ‘lost opportunity’ for small business

The focus on a capital gains tax has overshadowed other critical aspects of the Tax Working Group’s work, including the opportunity to reduce the burden faced by small businesses, says John Cuthbertson, NZ tax leader for Chartered Accountants Australia and New Zealand (CA ANZ).

The final report from the 11-person working group will go to Cabinet on February 18 and be publicly released three days later. The government plans to make a full response to the report in April, although the extent of the coalition’s commitment to its recommendations isn’t yet clear.

Cuthbertson says the continuing focus on a capital gains tax from commentators and the media has deflected attention from a rare opportunity for large-scale reform to the way our tax system works for small businesses.

Around 97 percent of Kiwi businesses have fewer than 20 employees and don’t have a business finance team, Cuthbertson says. This means the owners spend a disproportionate amount of time and energy on tax, at the expense of growing their business.

“In our submission to the working group, we drew up a number of proposals, for example introducing presumptive taxes for very small businesses based on turnover or gross income.

“This would remove all complexity around deductions and the amounts returned would be ‘close enough’."

However, Cuthbertson fears that the working group’s final report, “based on the tea leaves the group has liberally spread around, and the government’s reaction to it”, will contain precious little good news for these small businesses.

The initial remit for the Tax Working Group, led by former Labour government Finance Minister Michael Cullen, allowed for them to consider whether a progressive company tax - with a lower rate for small companies - would improve the tax system and the business environment, Cuthbertson says.

However, a similar regime has led to unnecessary complexity in Australia, and it’s unlikely to be accepted in New Zealand.

“The group also appears to be unconvinced by the merits of an overall cut in the company tax rate.”

So, if those measures are off the agenda, what will the working group’s final report have to offer small businesses?

“In its interim report, the TWG agreed with the CA ANZ arguments against a progressive company tax and decided to focus on cutting compliance costs,” Cuthbertson says.

It identified several areas for immediate action, including increasing the $2,500 threshold for paying provisional tax to $5,000-$10,000, increasing the $10,000 year-end closing stock adjustment to $20,000-$30,000, and increasing the $10,000 limit for the automatic deduction for legal fees.

“While we hope these will be recommended, and accepted by the government, they do not go far enough to redress the imbalance of the tax compliance burden between small and large businesses, and all the inadvertent and deliberate non-compliance that results.”

The CA ANZ submission, as well as calling for a presumptive tax for very small businesses, also asked the working group to consider:

  • de minimis thresholds for complex tax regimes, particularly the ones that bring in little revenue;
  • a standard fixed deduction or fixed adjustment rate for compliance cost-intensive activities such as maintaining Fringe Benefit Tax logbooks on motor vehicles and the threshold rules around the entertainment regime;
  • a Taxpayer Advocate Service as an independent “voice for the taxpayer” within the tax system. Taxpayer burn off, where it’s not commercially viable for the taxpayer to contest Inland Revenue’s position, is a real concern.

“If our small business recommendations are accepted, they will deliver a massive shot in the arm for the New Zealand economy, underpinned by small businesses,” Cuthbertson says. “Tax simplicity has a growth dividend.”

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