Compliance Issues: How Cullen could ease the burden

Bill Hale

Contrary to politically correct views, size does matter, particularly when it comes to absorbing the compliance cost burden faced in running a small to medium sized business.

While Dr Cullen in his recent budget and corresponding tax bill has made an effort to reduce compliance cost burdens on SMEs, his tinkering with the rules in some cases will leave them having to grasp and administer a whole new set of initiatives.

Recent surveys on how compliance costs effect business in New Zealand confirm that:
Comparatively, small businesses bear the brunt of compliance costs, on average it costs a small business $2500 per employee to deal with compliance issues each year, but only $500 per employee for a large business

Complying with tax requirements is far and away the biggest compliance cost in terms of time and money for SMEs

Getting your tax obligations wrong is costly in terms of penalties, interest and time and in extreme cases can force the closure of a small business

While Dr Cullen's latest raft of changes includes some positive measures, the bad news is that for the average SME the corresponding administration of some of these changes may mean even more time spent filling in forms.

Payroll Issues
Administering to the collection of taxes through an organisation's payroll is often seen by SMEs as doing the Government's tax collection job for them. Why not introduce practical measures such as forming a central government agency to administer payroll obligations? Let's call it the Inland Revenue.

SMEs could elect to use this central agency by paying gross salaries to Inland Revenue which would then make the appropriate deductions such as PAYE, student loan repayments, child support, superannuation contributions and the like, and pay employees directly.

Not only would this free up employers' time but it would also mean Inland Revenue had instant access to information regarding employees' tax positions, rather than needing to gather this information from employers.

Instead, a payroll subsidy has been proposed, which will apply for some small employers. However, further paperwork will be required to determine first whether you will be eligible for this and secondly what level of subsidy you are entitled to.

In fact employers' payroll obligations will increase as a result of the introduction of the KiwiSaver work-based savings scheme. Cabinet papers warned that the extra compliance costs of administering the KiwiSaver programme will impact most heavily on SMEs.

Provisional Tax and GST
Dr Cullen could also consider introducing practical measures to relieve the compliance cost in calculating and paying provisional tax, such as raising the provisional tax threshold from its current level of $2500 a year to a more meaningful figure such as $30,000 a year. This would remove the need to pay income tax in instalments until a decent profit level is being achieved.

Instead the Government is aligning provisional tax instalments with GST payments.

This change is based on government research that many small businesses would like to align tax payments with cashflow.

However, this same research also concluded that the key concern of SMEs in relation to their tax obligations is the excessive time spent filling in tax forms.

These new changes may result in small businesses now needing to calculate and pay provisional tax up to six times a year, which is completely at odds with reducing the compliance burden.

In future there will also be an option to pay provisional tax based on a ratio of your GST payments.

To take advantage of this change SMEs will have to file at least six GST returns a year, whereas many SMEs currently file only two.

This option may also increase the impact of getting your GST position wrong as an incorrect GST return will create a flow-on effect of getting your provisional tax wrong, increasing any exposure to penalties.

Depreciation
Depreciation rules have been altered to increase the rates for short-lived assets such as technology, as well as increase the threshold for immediately writing off assets with a cost base of less than $500 (previously the threshold was $200).

While these concessions will provide some relief in tracking smaller assets and deferring tax payments, businesses face an even more complex set of depreciation rates and application dates depending on the balance date of the organisation.

Perhaps the Government should take a much more pragmatic approach to depreciation by allowing SMEs to align their tax depreciation position with their accounting depreciation policy, rather than having a series of specific rates for each type of asset requiring businesses to maintain detailed tax fixed asset registers.

Fringe Benefit Tax (FBT)
SMEs can be thankful the Government has taken some pragmatic steps in relation to tracking minor fringe benefits provided to employees. Business tools such as mobile phones and laptops will now be exempt from FBT provided they cost less than $5000.

In addition, the exemption from FBT for small benefits has been increased to $200 per employee per quarter and $15,000 per employer per annum, meaning fewer employers will fall into the FBT net. However, employers may still need to track the level of benefits provided to determine whether they fall within these thresholds.

Once again the Government should take more significant steps, such as only seeking to capture fringe benefits in situations where income substitution really exists.

This recognises that FBT should be an avoidance mechanism rather than a purest view to tax any and all benefits that move.

*Bill Hale is a tax director at Deloitte.