Here’s what the changes mean for your business:
Inland Revenue calls this the accounting income method. It’s proposed that if your business has a turnover of less than $5 million a year, you can choose to pay tax every two months on income earned. In the past, you had to pay provisional tax in three instalments, based on an estimate of your likely tax bill for the coming year. However, you can still choose to pay in three instalments. The new pay-as-you-go option for provisional tax takes effect from April 2018.
Under the old rules, if you didn’t pay enough tax, you incurred a use-of-money interest charge until you cleared your account. Under the new rules, use-of-money interest no longer applies to:
- pay-as-you-go taxpayers who pay their taxes on time
- taxpayers who continue with three standard instalments, who pay on time and pay less than $60,000 a year in tax — Inland Revenue refers to these as uplift instalments.
If you pay more than $60,000 in tax a year — and continue with the three uplift instalments — use-of-money interest will only apply to the third and last yearly instalment of your provisional tax.
If you choose the pay-as-you-go option, you can set up your accounting software to calculate your taxable income every two months and tell you when to pay. You can also pay your taxes through your accounting system. Using software systems will help cut the time you spend manually calculating and paying your tax.
AVOIDING THE CASH CRUNCH
Pay-as-you-go is a much better option for provisional tax,” says Dunedin-based small business owner Ravi Vohara, of Pharmacare Specialty Ltd.
The changes could help small businesses avoid the sort of cash flow crises that force so many to close in their early years, he says. “They pay no tax in their first year, then in their second year they must pay two years’ tax. If they haven’t saved enough money at that point they can have real problems paying it all.”
Removing use-of-money interest reflects the fact that so many young businesses struggle to track their cash flow to make three large payments, he says. “I have been penalised in the past, and rightly so. But the current interest charge can unfairly burden small businesses. The new system is much fairer.”
Accounting software can make it easier for small businesses to see how tax affects their business, he says. “It can serve as a dashboard to tell businesses how they’re performing, alerting them to potential cash flow problems.”