Govt to axe provisional tax

John Key (Richard Cooper / Newshub.)
John Key (Richard Cooper / Newshub.)

An end to provisional tax as we know it is in sight, with the Prime Minister making the announcement in a pre-Budget speech in Wellington.

In his speech, John Key acknowledged small businesses meeting their tax obligations was a "particular challenge" and announced a tax package for them.

Provisional tax requires businesses to pay income tax in instalments during the year meaning they avoid paying a lump sum at the end of the year.

Currently, anyone who pays income tax may need to pay provisional taxes including individuals, companies and trusts.

Businesses have told Mr Key provisional tax is "hard to get right and expensive to get wrong".

"Perfect accuracy can sometimes be costly in a way that doesn't seem justified and some penalties are seen as punitive and discourage compliance."

Small businesses, with a turnover of less than $5 million, would be able to choose a new 'pay-as-you-go' system for provisional tax.

The tax is a major headache for small business because they can get stung with interest charges and penalties if they underestimate their projected earnings.

"This new option drops the estimation part and instead works out your tax payments on an ongoing basis throughout the year," Mr Key says.

The change could affect up to 110,000 small businesses, starting from April 1, 2018 when Inland Revenue's new computer system is up and running.

Mr Key says the Government wants to get businesses out of the use-of-money regime because interest charges are a burden and frustrating for taxpayers "who are simply following the rules".

Under the system, interest is paid, or received, on the difference between a business' actual tax liability for the year and what they paid in provisional tax, which is only known at the end of the year.

Taxpayers who use the standard or "uplift" method won't be subject to the use-of-money interest if their tax liability is under $60,000 and is paid on time.

The change is expected to take out 67,000 taxpayers from the use-of-money interest regime.

For taxpayers with a tax liability above $60,000 who use the uplift method, use-of-money interest will only apply from the third and last instalment of provisional tax.

This change potentially benefits a further 19,000 taxpayers.

Under the plan, contractors will be able to choose a withholding rate which suits them -- payments to around 130,000 contractors have withholding tax deducted from them each year.

From April 1, 2017, contractors will be able to choose their own withholding rate, though a minimum of 10 percent will apply.

For new debts after April 1, 2017, the 1 percent ongoing monthly penalty will go for income tax, GST and some other payments.

The IRD will release a paper today, which the public will be able to give feedback on.

Mr Key estimates the package will cost $187 million over four years. It will acome out of new spending in this year's Budget.


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