Tax changes for efficient business

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Every now and again it is nice to be able to write about some positive changes that are coming through which make life easier. New legislation enacted in February has introduced such changes. They substantially simplify obligations under the provisional tax regime. Although the topic itself is a little ‘dry’, it is worth having a read because the changes are quite fundamental, particularly for small and medium sized businesses.

Current Provisional Tax rules
Currently, provisional tax is required to be paid through the course of the year with use-of-money interest (UOMI) applying in cases of over or underpayment at each payment date.

The vast majority of taxpayers meet their provisional tax obligations under the standard uplift method, which essentially bases their liability on 105 percent or 110 percent of their previous year’s tax payable.

While the standard uplift is a simple means to an estimate provisional tax payable, UOMI applies if a higher liability is ultimately assessed.

New safe harbour threshold for UOMI
Individuals have had the benefit of a concession where UOMI is not charged by IRD until their terminal tax date, which is typically February 7 or April 7 the following year.

From the 2017/2018 income year, that concession is being increased from $50,000 to $60,000 and being extended to all types of taxpayers, such as companies.

There are requirements that need to be met in order for the concession to apply, such as having already paid the minimum obligation under the standard uplift method.

Inland Revenue expects the changes to the safe harbour threshold will eliminate UOMI charges for approximately 67,000 taxpayers, at least 63,000 of these being non-individuals who previously do not qualify for the safe harbour concession.

Removal of UOMI for first two provisional tax instalments
A further reduction in the scope of UOMI will benefit those taxpayers who have a tax liability of more than $60,000 and are not otherwise covered by the above concession.

As referred to above, most taxpayers are required to pay provisional through the course of the year, but if their crystallised liability as per their tax return is more than their provisional tax paid they will incur UOMI.

From the 2017/2018 income year UOMI will not be charged on the shortfalls arising at the first two provisional tax payment dates.

For example, a taxpayer with a March 31, 2018 balance date with a standard uplift liability of $300k would be required to pay $100k on August 28, 2017, January 15 and May 7, 2018.

But, if the taxpayer’s final liability per its income tax return came in at $500k for the year, UOMI would apply under the old rules to the $67k shortfall accumulating at each due date.

However, under the new rules UOMI would only apply on the $200k shortfall that exists from May 7, 2018.

Similar to the first concession, the taxpayer must make the minimum payments required under the standard uplift method on the first two instalment dates.

Where the taxpayer does not make the required instalments, UOMI will apply on the first two instalment dates based on the lower of the difference between:
•    The amount due under standard uplift and the actual payment; or
•    One-third of the residual income tax liability for the year and the actual payment.

To be eligible for the concession, companies within a group will all be required to use either the standard uplift or GST ratio method for calculating provisional tax.

This rule is designed to prevent related entities gaming the differences between the standard uplift and estimation methods to reduce exposure to UOMI.

Late payment penalties
The late penalty regime will also change with effect from April 1, 2017, with the removal of the one percent monthly incremental late payment penalty on unpaid GST and income tax amounts.

In making this change, the Government acknowledges that the current late payment penalty mechanism does not effectively encourage taxpayers to comply.

In its attempts to keep tax simple, IRD is trying hard not to overwhelm taxpayers with excessive penalties while it struggles under the huge amounts of uncollectable debt that are created by such penalties.

Hopefully this change will help in its effort to engage with taxpayers to collect outstanding debts.

Annual FBT threshold
Also coming into effect for the 2017-18 year onwards, the threshold for filing FBT returns annually is increasing from $500,000 to $1 million of combined PAYE and ESCT.

The doubling of the threshold will enable taxpayers who have been accounting for FBT quarterly to switch to accounting for it annually. Having to file fewer returns each year will certainly help make compliance with the FBT regime easier.

The Government and Inland Revenue are making progress in their bid to make tax simpler.

The provisional tax, UOMI, penalty and FBT changes are a positive step forward and will affect many New Zealand businesses.

It is important for businesses to understand the new rules to ensure they qualify for the concessions and take advantage of the changes.

The comments in this article are of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.

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About Author

Hayden Farrow

Hayden Farrow is a PwC Executive Director based in the Waikato office. Email: hayden.d.farrow@nz.pwc.com

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