Date posted: 5/02/2019 6 min read

TWG report a lost opportunity for small business

Small recommendations don’t go far enough to redress tax compliance burden

In Brief

  • CA ANZ fears final TWG report will be missed opportunity for broad SME reforms
  • 97% of NZ small businesses have less than 20 employees and face outsized imposition of tax compliance

Anyone following media coverage of New Zealand’s Tax Working Group could be forgiven for thinking that all that the 11 members have been doing for the past year has been drawing up a ground-breaking (for New Zealand) broad-based capital gains tax (CGT).  

It’s something many New Zealanders apparently don’t want and the Opposition National Party has promised to axe if it gets a chance.  

The working group’s final report will be made public on 21 February, but the Coalition Government is yet to indicate the timing and extent of its commitment to the recommendations.  

The group’s exertions have obviously not just centred on a CGT, but the media focus on just that has deflected attention from a rare opportunity for large-scale reform to New Zealand’s tax system. These largely overlooked areas include reducing the tax compliance burden faced by most Kiwi businesses – those that don’t have a finance team.  

In our submission to the working group, we drew up a number of proposals to help small businesses spend less time and energy on tax and more on growing their business, 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”.  

Chartered Accountants Australia and New Zealand (CA ANZ) fears that the working group’s final report, and the Government’s reaction to it, will be a missed opportunity for the broad-based reforms initially promised by the working group exercise.  

And based on the tea leaves the group has liberally spread around, there will be little good news for businesses with fewer than 20 employees – 97 per cent of all New Zealand businesses – which daily face an outsized imposition of tax compliance compared with larger firms. 

Broad remit 

The group, led by former Labour Government Finance Minister Sir Michael Cullen, was given a broad remit to examine the structure, fairness and balance of the New Zealand tax system with a couple of issues, such as removing the family home or the land under it from any CGT, put out of bounds.   

In particular, it was asked to consider the economic environment over the next five to 10 years; what role the taxation system can play in delivering positive environmental and ecological outcomes; and, of course, whether a system of taxing capital gains or land would improve the tax system.  

Its members were also told to think about – in a nod to our concerns about small business tax compliance – whether a progressive company tax (with a lower rate for small companies) would improve the tax system and the business environment.  

That, we are sure, is a non-starter for very good reasons, which will be appreciated by Australians familiar with the complexity of a similar regime in their country. The group also appears to be unconvinced by the merits of an overall cut in the company tax rate.

So what’s in it for small business?  

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 group agreed with our arguments against a bifurcated company tax and decided to focus on cutting compliance costs.  

It identified several areas for immediate action, including increasing the NZ$2500 threshold for paying provisional tax to NZ$5000-$10,000, increasing the NZ$10,000 year-end closing stock adjustment to NZ$20,000-$30,000 and increasing the NZ$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.  

In our submission, as well as calling for a presumptive tax for very small businesses, we asked the working group to consider introducing:

  • 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 log books on motor vehicles and the threshold rules around the entertainment regime
  • an independent “voice for the taxpayer” advocate service in the tax system. Taxpayer burn-off is a real concern as smaller businesses do not always have the resources to escalate concerns or resolve disputes with Inland Revenue.

None of this is as sexy as a capital gains tax – which by the way, we don’t support in the form of a comprehensive regime but as an extension of existing rules – but if our small business recommendations are accepted, they will deliver a massive shot in the arm for the economy, underpinned by small businesses. Tax simplicity has a growth dividend.

This story originally appeared in Newsroom.co.nz on February 5, 2019

 

CA ANZ memorandums to the TWG

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