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How could provisional tax be improved?

Provisional tax is the mechanism by which most businesses pay tax during the year.  The exact amount of tax to pay for an income year can only be determined after the year has ended.  The provisional tax rules, however, are designed to ensure that tax is paid during the year, rather than at the end. 

For example, the calculation and payment of business income tax could be based more on when income is earned during the year – much like a PAYE for business.  This has the potential to simplify the calculation of provisional tax, create more certainty for businesses, and better reflect cashflow.  Alternatively, a simplified system where provisional tax payments are based on another proxy (for example, a percentage tailored on a business’s turnover) could also be investigated.

How important is improving the provisional tax rules in reducing compliance costs for business?  Are there other more important issues the Government should be focusing on instead, or as well?

The Government seeks feedback on ideas for more effective, practical and simple methods of calculating and paying provisional tax. How could provisional tax be better aligned to other business processes?

Comments

Small Business Battler
As unfair as provisional tax can be, small companies without the benefit of in house accounting staff, will struggle with processing and cash flow if the of filing and paying tax is too frequent. Trouble is there is no one package fits all. I wouldn't like to see payments more often than 3 monthly personally. As there are no variences, I see no reason why PAYE is not paid weekly with wages, and the statement filed at the end of month. Goodbye penalties. We still live in world where some are not up to date with technology, so forcing online interface will cost them.

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1 year ago
Keith Edwards
I'm retired and my primary source of income is superannuation but I also do a bit of advisory work. I've managed to get over the first 2 years and all of that prov tax/terminal tax all happening close together but I still have the problem of not knowing what's coming in in advance. I'm below the GST threshold so that's not an issue. I don't like the 10% uplift approach to prov tax as my income is more likely to reduce over time. Nor do I like the estimation approach as I could end up with TVM interest and penalties if I get it wrong. What I would like to be able to do is simply pay tax as I earn the income but at my top rate not at the top tax rate. Surely that shouldn't be too difficult.

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1 year ago
Navin Nembhani
Many overseas workers come to New Zealand as Independent Contractors on temporary assignments. An optional "PAY AS YOU GO" tax payment method would eliminate the need to pay PROVISIONAL TAX for a proper and timely account balance. Kindly change the PROVISIONAL TAX rules as soon as possible.

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1 year ago
Michael Morris
I am a retired Chartered Accountant and a senior partner of KPMG. I want to focus on the difficulties that provisional tax can cause for individuals earning income from agricultural activities. As an example, for over 20 years I have been a partner in vineyard in Hawkes Bay. There is nothing that can be described as a "Normal" year when predicting the results of a grape growing enterprise. Over the last 5 years it has been like this: 2011 below average crop and income. 2012 very small crop, a significant loss was sustained. 2013 an excellent crop of high quality, above average income. 2014 another good crop, greater volume than budgeted, best income result. 2015 small crop, high quality but will only just break even. After each year the partners' provisional tax is based, along with other income, on that years income. There needs to be flexibility for taxpayers to adjust their provisional tax instalments by reference to their latest estimates of income without incurring stiff penalties if they get it wrong.

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1 year ago
Russell Parry
There are many pitfalls in the current application of provisional tax to small business Firstly, a small operator does not have the capability to adequately judge his turnover, or profit so that when eventually the terminal tax calculation is made it is found that he has underpaid provisional and that penalties and interest accrue from August of the previous year. The shortfall is not sufficient to obtain a tax pooling amount and because of a couple of late sales in February or March, and overseas order or some new client, a small business is then faced with the worry of UOMI. A simple solution would be to extend the safe harbour option to small business (Turnover less than five hundred thousand or some other measure) or a total tax bill of $40,000 provided all payment of prov tax have been made on time and in accord with last year plus the percentage. A monthly payment option, that rewarded the taxpayer with a market rate of interest would be beneficial for both the government and the the taxpayer A further problem is the time it takes to release family support credits. If you get the payment weekly the balance up at end of year is quick, and usually it means that a person owes IRD, and the debt to IRD for family support arrears must be substantial if some of our clients are common. However if the client takes our recommendation and claims at the end of the year, it can take up 10 or more weeks before the refund is issued. I believe that refunds for Family Assistance should be processed far quicker than at present. And a final point on family assistance - the support offered to employed people who earn less than the family minimum should be extended to self employed persons. Possibly not those employed through a company but those who are sole traders are penalised when they have a very poor year, (Canterbury earthquake year in particular) as they are not allowed this additional benefit. As they do not trade under a company they cannot mitigate income so are expected to pay 33% in good years, but do not receive any benefit in bad years.

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1 year ago
Nicholas Perry
As an Australian Ex-Serviceman living in New Zealand (for over 20 years) the need to pay Provisional Tax on my Service Pension is a constant battle. What I receive is a known constant within a 6 month period,January > June and July > December. The only variable is the Rate of Exchange. I'd really benefit from a system set up where the fortnightly funds could be forwarded to a bank account, converted to the current Rate of Exchange, have PAYE applied (taking into consideration my Super) and then made available to me. I could then be cut from the IR3 Return list. This is not an impossibility as I've recently been required by Work and Income to apply for an Australian Age Pension, which if approved, will replace my NZ Super. To this end I've already had to open a Westpac Account for these possible funds to be processed. As both Governments, Australia and New Zealand, appear determined to work together on benefits would this not be a sensible solution to my situation?

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1 year ago
Simon T
1) Simplify provisional tax but do not replace it with a PAYE-like scheme. A PAYE-like scheme will inevitably be focused on “employee-like” self-employed people. This would create a compliance costs for self-employed people needing to ensure they don't look “employee-like” because clients wouldn't want the headache it creates. Clients would wear the compliance costs of PAYE processes and the increased legal risk of a contractor successfully claiming be a de facto employee; the court hearing such a claim cannot ignore that the government has already designated (and the client has accepted) that the person is “employee-like” - - - - - - - - - - - 2) Make the interest rates for under-paid prov tax EQUAL to the overpayment interest rate. Then set the shared interest rate to a number that incentivises businesses to have collectively (in aggregate) paid the right amount of prov tax. The current system penalises people who underpay AND who overpay provisional tax. If under/over payments balance then the NZ govt is getting all the money on time, and the rewards and penalties are fairly shared across the tax-paying businesses.

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1 year ago
Ek Long Tan
I support pay us you earn income tax. Sometimes I find it difficult to pay the GST and when the Provisional Tax falls due. I don't agree to pay first before you earn, on top of it every year there is a addition 5% to pay whether or not one's earning had increase. This cause great stress to find the money when business had taken a down turn.

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1 year ago
Bob Del
I agree that many small businesses would benefit from a more streamlined Pay as You Earn system - I've run mine for 30 years and the end of year tax time potentially sees estimates go out the window - the worry being that savings-for-tax are insufficient to cover EOY assessment. I agree it's likely the obvious time to assess tax to pay is while doing the 2 monthly GST calculations - that would be efficient - as long as I didn't feel bound to relying on an accountant every 2 months. There probably will still have to be an EOY wash-up where an accountant gets involved -to consider the overall picture eg other income / partners income & family trusts /expenses etc. Staying with the Prov tax system - or an updated version - may still suit some businesses and those without the online technologies, so that should maybe still be an option.

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1 year ago
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