As part of Budget '16, the Government announced a number of new business tax measures. One of the most significant changes is to the schedular payment rules which affects the way contractors will pay their taxes. From April 1st this year there will be two main changes to schedular payments.
Firstly, contractors who work via a recruitment agency or labour hire business will have tax deducted automatically by the recruitment agency. Recruitment agencies who pay contractors to do work for their clients under a labour hire arrangement will need to deduct tax when they pay contractors and include the details of the payments on their employer monthly schedule.
Secondly, contractors who aren't already required to have tax deducted from their payments have the option to have tax deducted. The contractor chooses the rate at which they pay and this is based on their projected income. This is only possible if the person paying them also agrees to this approach.
Additional to these changes, contractors already paid under the schedular payment rules will now have the option to choose a tax rate that better suits their circumstances without applying to IR.
The changes are designed to provide greater choice and decrease the risk of getting a significant tax bill at the end of the tax year - thus reducing the risk of non-compliance.
According to a statement from Inland Revenue, some of the biggest benefits to contractors are around the removal of end of tax year stress, as they can now pay their tax throughout the year - the schedular payment system is aligned more closely with the PAYE system for salary and wage earners where they pay tax as they earn.
In turn, this makes it easier for contractors to be compliant, and gives them less to worry about so they can spend more time focussing on running their business.
Another benefit to contractors is they won't have to set aside a significant pool of funds to cover their end of year tax payment. There will be times when contractors might have been tempted or needed to dip into those funds to use for other things - with the changes to the system any temptation is removed altogether.
Inland Revenue has created an online estimation tool to make it easy for contractors to work out their tax obligations.
Contractors should visit the Inland Revenue website to find out more about the changes and what they need to do.