Govt to unveil business tax shakeup

Planes lined up at Milford Sound Airport - seasonal businesses like those in the tourism sector face a difficult time with the way provisional tax is calculated. Photo / Getty

Prime Minister John Key is expected to make an announcement today around how businesses pay tax, the Herald understands.

Key is expected to announce the changes when he addresses a BusinessNZ event today in Wellington at noon.

Part of the announcement is expected to focus on provisional tax, - the mechanism through which businesses can pay income tax in installments during the year.

This lets businesses "spread the load", says Inland Revenue and avoid having to pay a large amount of tax at the end of the year.

The present set up sees businesses pay three installments during the year in August, January and May.

However, the regime has faced criticism because it requires businesses to forecast what they are going to earn during the year and make payments of tax accordingly.

If a business underpays, it is charged interest of around 9 per cent.

The payment schedule can also make it difficult for a business, for instance, in the tourism sector that earns the vast majority of its income during the summer months but is required to pay tax ahead of that in August.

Opposition parties and Inland Revenue have suggested changes to this regime.
Last year, Labour leader Andrew Little proposed a new flexible tax system for small businesses where they be able to pay as they go, not estimate taxes a year in advance.

He also advocates scrapping penalties for late payment of provisional tax.

Tax plan

How is tax currently paid?
Under the current system GST and PAYE are paid three to four times a year, and often estimated for the full year at the end-of-year return.

How could a new system work?
Under one proposal made last year, tax could be paid and calculated more frequently, giving companies a better idea of tax status.

Why is this being changed?
The change is part of a Government move to try and modernise and simplify the tax system in the next three years to increase the rate and accuracy of tax collection.

Read a Government 'Green Paper' on the tax issue published last year here