What does Budget 2016 mean for SMEs and tax?

Budget 2016 bought a raft of changes for SMEs with regard to tax. Some more positive than others but overall, it was pleasing to see that the Government took on board feedback from SMEs when making these. The changes that are likely to impact positively on many taxpayers are in relation to provisional tax and use of money interest regimes.

To ensure more people are meeting their tax obligations, amendments are also being made to how withholding tax applies to contractors. Most new initiatives will apply from 1 April 2017 (being the 2018 tax year).

Provisional tax and use of money interest regimes

Proposal - currently, individual taxpayers with residual income tax of less than $50,000 are (broadly) not subject to use of money interest until terminal tax date. This is unless they have chosen to use the estimation method rather than the standard uplift method to calculate their provisional tax. It is proposed that this threshold be increased to $60,000 and extended to all taxpayers. Use of money interest will only apply from the third provisional tax installment date if there is a shortfall at that point.  

Provisional tax is a bugbear for many. High amounts of stress can be caused from needing to accurately forecast annual profits months in advance and you can potentially be subject to punitive interest charges if you get it wrong. The creation of new payment options which remove interest charges from the mix is a great positive step. Additionally, it’s great to see that some of the provisional tax proposals will apply to all taxpayers, large and small. 

There will be some upfront compliance costs for businesses as they get to understand the raft of additional optional rules which they can potentially apply, but with time, businesses will likely settle on a provisional tax method which suits their needs.

Withholding tax proposals

Proposal - contractors will be allowed to select their own withholding tax rate without the need to make an application to Inland Revenue for a special tax code. Where a contractor does not select a rate, it is proposed that a default rate of 20% will apply, and if a contractor does not provide an IRD number, a non-declaration flat rate of 45% will apply. The withholding tax rules will be extended to specifically cover all contractors operating through labour-hire firms.

The changes around withholding taxes may not be popular with some parties; however, they are necessary as current rules have been abused and used by individuals to obtain social assistance they are not entitled to. Most people can probably appreciate the greater good of getting contractors back in the tax base and paying their fair share.

There may be some detail to be worked through to determine exactly what a 'labour-hire arrangement' is, as currently this appears to be quite a wide definition. The devil will be in the legislative detail with regard to defining who will be subject to the labour-hire withholding tax rules, but this could potentially be a significant change for some businesses.

Other initiatives

  • Removing incremental late payment penalties from GST, provisional tax, income tax, and Working for Families tax credits
  • Removing the requirement for RWT certificates of exemption to be renewed annually
  • Increasing the self-correction threshold for tax errors from $500 to $1000
  • Increasing the threshold to allow more taxpayers to pay FBT annually rather than quarterly
  • Simplifying FBT for companies who provide motor vehicles to shareholder-employees
  • Simplifying the process for businesses claiming deductions for use of motor vehicles and home office space
  • Sharing information about significant tax debts with credit reporting agencies
  • Sharing information with the Companies Office

These other initiatives should all be viewed positively by business, albeit they are largely tinkering at the margins. What will be interesting to see is whether this is just a beginning of a bigger programme of making tax simpler for businesses. One would hope so. The whole transformation of Inland Revenue’s computer systems is a 'once in a generation' opportunity to sort out rough edges which impact both sides of the tax net. 

Partner, Deloitte Private
Darren enjoys working with people who are excited about what they do and who have a drive to succeed. He seeks to first understand their vision and the issues they face, then work with them on how they can overcome any challenges - whether that be through specialist tax knowledge or through leveraging the wider Deloitte Private team.