Review may help small business taxpayers

By BRIAN FALLOW

Life may become easier for small business taxpayers with erratic cash flows.

Finance Minister Michael Cullen said the Government was reviewing the rules to see whether income could be calculated on a cash, rather than an accrual, basis for small taxpayers.

On an accrual basis income becomes taxable as soon as it is earned, not when the cash comes in, which may be considerably later.

Despite speculation to the contrary, the Government has not decided whether to go ahead with a change to the taxation of outbound international portfolio investment.

It is currently a mish-mash, with distinctions between active and passive investments, grey list and non grey list countries and different rules depending on the domicile of fund managers.

The McLeod tax review recommended replacing all that with the risk-free return method, taxing a notional yield on the sum invested at the start of a tax year as if it were all invested in Government stock.

This drew the criticism that it would be in effect a wealth tax rather than an income tax, and tax would still accrue even if the investment generated no cash or fell in value.

But Cullen said the idea warranted further consultation between officials and the private sector, at least for "offshore equity investment on capital account, outside a business context".

Another McLeod recommendation, a tax holiday for the foreign-sourced income of new migrants, will also be the subject of further consultation.

But Cullen has ruled out a $1 million tax cap for individual taxpayers.

He said officials regarded McLeod's proposed 18 per cent tax rate for new foreign direct investment as unworkable, because it would be too hard to maintain the boundary between new and existing investment.

"However, before rejecting the idea I will release their analysis for comment from interested parties," Cullen said.

He took a swipe at frequent claims that New Zealand is highly taxed by developed country standards.

New Zealand was unusual in having little in the way of social security taxes or levies on businesses or individuals -- ACC being the only one of any size.

Comparing the company tax rate with Australia, for example, without taking Medicare levies and compulsory superannuation payments into account, gave a misleading picture, Cullen said.

He cited a recent Economist article comparing the total cost to business of corporate taxes, social security levies, local body rates and excise duties.

"In the six countries studied the total burden varied form 9.5 per cent of GDP for the United States to 19 per cent for France. The comparative figure for New Zealand is about 7 per cent of GDP," he said.

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