At a glance: Provisional tax changes

At a glance: Provisional tax changes

John Key has today announced three changes to the laws on provisional tax, which he says will mainly benefit small businesses. But what are the changes and who will be affected?

The three changes:

What is use-of-money interest?

It is money paid or received depending on the difference between the amount of provisional tax paid and the actual amount of tax liability the business owed.

Who will this affect?

Small businesses, who turnover less than $5 million. Up to 110,000 small businesses could be eligible.

What does it mean?

Currently businesses have to estimate the amount of tax they are likely to pay for the coming year and pay that amount in three installments. A new "pay-as-you-go" option will allow businesses to stop estimating and pay tax as they go throughout the year.

Every two months the new software will calculate taxable income for that period and prompt businesses to pay what they owe, generally at the same time as paying GST.

This will affect contractors, allowing them to choose a withholding rate that suits their individual circumstances, instead of the tax rate being fixed.

For new debts after April 1 2017, the 1 percent on-going monthly penalty will no longer exist for income tax, GST and some other penalties.

The immediate penalty that applies to late payments, and the 4 percent penalty after a further week, will remain.

Auckland Chamber of Commerce Chief Executive Michael Barnett said the change will make compliance easier for small and medium sized businesses.

"It was difficult for small to medium businesses because they were forever guessing; this puts some certainty into it. And the company should improve their cash flow as well," he said.

The package will cost Government $187 million over four years.