How about some real innovation on tax law?

Last year the (then) minister of commerce, Simon Power, announced the National government would be slashing $90 million per year from compliance costs for business, particularly focused on the small and medium business sector.

We now have a special reporting board set up to work out how this is going to happen, and a working party made up of various sectors are operating to tight deadlines to get the new reporting regime in place.

Is it a good idea? Anything that saves our small and medium business some money and allows them to focus on growing their business is a good thing. 

But does it go far enough?

When you think about it, we have about 450,000 SME businesses in New Zealand.

If we save $90 million in compliance costs, each business will benefit by only $200 per year. It's hardly going to be the make or break for businesses.

So, what's next?

Well, maybe tax simplification could be the answer if it went hand-in-hand with the reduced reporting requirements. 

Interestingly enough, the New Zealand Institute of Chartered Accountants (NZICA) released a thought leadership paper back in October 2009 which sought to address this very issue.

Unsurprisingly, when NZICA first released the paper, it really didn't get much exposure and certainly didn't get much support. I think it's fair to say there were a number of professionals that were concerned about their own businesses disappearing if these radical changes gained widespread acceptance.

Now, a couple of years down the track, version two of this paper has been made available for consultation.

It is important to understand that this paper serves to prompt further thought, with a view that removing compliance on small and micro business would reduce cost and allow these businesses to grow.

The key component to the paper is that small and micro businesses would no longer need to prepare financial statements for tax purposes.  Now this is really stretching the boundaries, and really going to reduce costs for small businesses if it is accepted.

Basically, any business that is not registered for GST and has total sales of less than $60,000 will pay tax at 14 percent of turnover unless they are a trader, when the rate will be 7 percent.

Small businesses will be those that have sales revenue between $60,000 and $600,000, and they will pay their income tax when they pay their GST – either on a two monthly basis if that remains or on a quarterly basis if that change is also adopted.  Most of our current tax rules will become a thing of the past, and we will simply pay tax on a cash flow basis.  That is, 'money in' minus 'money out' = profit, and then multiply that by the tax rate. No need to worry about capital expenditure and depreciation – the whole lot is deductible for tax purposes.

The biggest impediment is likely to be the outdated IRD computer system. I did hear the Prime Minister recently announced that they are looking at throwing $1 billion at an upgrade. How long this will take I can't say, but maybe a new system will be the catalyst for change?

Does this all sound too good to be true?

Maybe, but I think the 48 percent of New Zealand businesses that have revenue of less than $600,000 per annum will love the reduced compliance costs. 

Maybe that means that these businesses can focus on getting quality and timely reports out of their systems that allow them to make real decisions for real benefit.

Matt Bellingham is chief executive and business improvement director at Hayes Knight

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