Business Tax Proposals
The government has announced a raft of Inland Revenue’s proposals aimed at business taxation as part of the Inland Revenue’s Business Transformation agenda.
The proposals are being consulted on include a focus from the government to move to simplify tax compliance matters for SME businesses.
With the majority of franchisee business owners fall into SME category, these proposed changes may how they manage their tax affairs. The changes are seeking to move SME businesses from ‘shoe box’ accounting to adopt accounting software.
Pragmatic position
Some commentators reference the Prime Minister’s speech releasing the issues paper, as pointers to what the Governments thinking is on business tax as follows :-
- Provisional tax is hard to get right and expensive to get wrong
- Perfect accuracy can sometimes be costly in a way that doesn’t seem justified
- Some penalties are seen as punitive and discourage compliance
The overriding messages behind the changes is to highlight a change in direction towards a more pragmatic approach at the expense of accuracy. This in our experience is a shift from the current practices the IRD adopt where accuracy is sought with consideration given to the expense to determining this.
Summary of main proposed changes:
- Reduction of Use Of Money Interest (UOMI) and Penalties to apply for Provisional Tax payments for all tax entities from 1 April 2017
- A new accounting based method, called Accounting Income Method (AIM), to calculate and pay provisional tax aligned with GST that removed UOMI and Terminal tax from 1 April 2018
- The ability to pay Provisional tax on a salary and wage paid to shareholder employees
- Flexibility to choose your own Withholding tax rate for contractors
- Allowing the Inland Revenue Department (IRD) to report tax debt to credit rating agencies and to share information with the Companies Office about serious offenders.
How will these affect franchise business owners?
Our initial thoughts on how these proposed changes may affect business, from the information provided to date are as follows:
- Cashflow planning
- Provisional Tax Planning via the AIM method will apply to business owners with an annual turnover of less than $8million.
- The cashflow benefits are:
- No UOMI
- No terminal tax liability
Cash flow planning implications are:
Your Provisional tax payment frequency is now aligned to when you pay your GST.
For example if you are 2 monthly GST filing frequency this may see result in paying your tax spread over 6 payments over the year.
The amount of Provisional tax to pay will mirror any variations or seasonality of business trading patterns.
In the event of a loss for a period, the option of having tax refunded or the loss carry forward.
Accounting Practices & Software
Franchisee business owners my need to consider:
- To benefit from the AIM method the business owner must use accounting software the meets basic specifications ( not specified yet )
- The of paying provisional will place more onus on the franchisee business to keep the record keeping up to date and to be accurate with processing the information. ( the adage garbage, garbage, out applies)
- This may require franchisee business owner to upskill or consider using a book keeper, or perhaps work closer with your accountant.
Franchisors may need to consider:
- Evaluating and choosing a preferred accounting software solution
- Change to the franchise agreement to ensure adherence to using a prescribed software solution
- Tweak training around book keeping procedures of franchisee
Franchisee Recruitment & related business matters
Franchisors will now have visibility of an applicant’s credit history where potentially former business failure has occurred and defaults on tax has occurred.
Prospective Franchisees seeking franchise, could potentially have application for finance, declined based on poor credit rating.
Bad debt costs could be of Franchisees reduced by not advancing credit to customers seeking credit who may have a dirty credit rating with the IRD. This may see a more conservative approach to who credit will be given or those that operate on COD basis.
Withholding tax on Contractors
Ease of compliance now by being able to nominate tax rate will ease the burden on for those business owners who employ contractors. This removes the need to apply for special tax codes
Summary
Overall there is something for every franchise business owner in these raft of business tax proposals.
While the changes are broadly positive, the package is primarily designed to support the IRD business transformation agenda. Consideration should be given to what costs a business may incur from adopting these proposals and how these changes may impact your business.
This commentary is of a general nature only and is no reliance should be placed on this in place a tax consultation. Circumstances vary from business to business, advice should be sought on the specific circumstances of any given business owner.