Changes to help small and medium enterprises

Sections DB 62, EB 23(1)(b), EW 13(2), EW 17(1)(a), EW 25(2) and (3), EW 54, EW 56, EW 57(1),(2),(3) and (9), EW 58(1),(3),(4) and (5), EW 59, EW 60(2) and (3), RD 22(3) and (4), RD 45 (2)(a), (2)(b), (3)(a), (3)(b), (4)(a), (4)(b), RD 46(2) to (6), RD 50(5), RD 52(3)(b), RD 53(4)(a), RD 60(1),(2)(b), RD 61(1)(a), RZ 3, RZ 5 and YA 1 of the Income Tax Act 2007

Sections 120KE(1)(b) and 3(1)(e)(ii) of the Tax Administration Act 1994

Sections 15(2)(a), 19A(1)(b)(i) and 51(1)(a) of the Goods and Services Tax Act 1985

The main purpose of the new rules is to help smaller businesses deal with the economic pressures currently being faced as a result of the economic downturn. The measures introduced were part of a wider package of relief measures aimed at helping businesses' cash flows and reducing the amount of time that small and medium enterprises (SMEs) must spend on their tax obligations.

As SMEs account for over 95% of New Zealand's businesses it is important that the people who operate them can concentrate on the things that will help their businesses. Improving cash flows and reducing the number of tax returns, payments and calculations SMEs have to deal with will help to ease the tax burden they currently face, and free up time and money to focus on strengthening their businesses.

Key features

The new rules introduce the following changes:

• a new threshold of $10,000, below which all business-related legal expenditure is fully deductible
• a rise in the low-value trading stock threshold, from $5,000 to $10,000
• extending the methods for businesses to account for financial arrangements
• a rise in the pay as you earn (PAYE) once-a-month filing and payment threshold, from $100,000 to $500,000
• a rise in fringe benefit tax (FBT) thresholds, under which accounting for FBT is not required for minor benefits provided to employees. The new thresholds rise from $15,000 a year per employer and from $200 each quarter per employee, to $22,500 and $300 respectively
• extending FBT annual filing to include closely held businesses whose FBT liabilities are restricted to one or two vehicles used by owner-employees (regardless of their annual PAYE deductions)
• a rise in the FBT annual filing threshold, from $100,000 to $500,000
• a reduction in the provisional tax uplift rate from 105%/110% to 100%/105%, to apply from 1 April 2009 to provisional tax payments for the 2008-09 and 2009-10 income years made after these dates. Where certain companies are currently allowed to use uplift ratios of 95%/100% (as a result of the reduction in the company tax rate to 30%), lower uplift ratios of 90%/95% will instead apply
• a rise in the provisional tax use-of-money interest (UOMI) safe harbour threshold, from $35,000 to $50,000
• a rise in the Goods and Services Tax (GST) six-monthly return filing threshold, from $250,000 to $500,000
• a rise in the GST payments basis threshold, from $1.3 million to $2 million
• a rise in the GST registration threshold, from $40,000 to $60,000
• minor remedial matters relating to changes made by the Taxation (Urgent Measures and Annual Rates) Act 2008.

Application dates

The new rules generally either apply to the 2009-10 or later income years, or from 1 April 2009.

Detailed analysis

Introduction of a new threshold of $10,000 below which all business-related legal expenditure is fully deductible (application from the 2009-10 income year)

New section DB 62 simplifies the rules for deducting legal expenditure.

This change allows businesses an immediate tax deduction for business-related legal expenditure, up to $10,000 a year, without having to distinguish between revenue and capital. This is intended to reduce tax compliance costs and tax liabilities.

For example, if a business's total bill for all legal fees in a given income year is $10,000, the entire amount will be deductible without requiring analysis of which amounts relate to non-deductible capital expenditure and deductible revenue expenditure. However, when a business's total bill for all legal fees in a given income year is $20,000, normal tax rules will apply and capital and revenue amounts must be separately identified for the full $20,000.

The new rules also introduce a definition of "legal expenses" in section YA 1 of the Income Tax Act for this purpose. "Legal expenses" for this purpose means fees for legal services (as defined in the Lawyers and Conveyancers Act 2006) provided by members of the New Zealand Law Society or an Australian equivalent.

Higher low-value trading stock threshold (application from the 2009-10 income year)

Section EB 23 of the Income Tax Act has been amended to raise the threshold for low-value trading stock from $5,000 to $10,000 (based on the value of the trading stock).

This change will reduce record-keeping and the amount of time some businesses must spend each year counting and valuing stock.

Accounting for financial arrangements (application from the 2009-10 income year)

Sections EW 13, 17 and 25 of the Income Tax Act have been amended to:

• allow non-individuals, subject to existing thresholds, to return income tax in relation to financial arrangements on a cash accounting basis; and
• allow more taxpayers to use the straight-line basis for accounting for financial arrangements, by increasing the existing threshold for this from $1.5 million to $1.85 million (based on the total level of financial arrangements).

The definition of "cash-basis" person has been amended in section EW 54 and sections 56 to 60 of the Income Tax Act.

Higher PAYE once-a-month filing and payment threshold (application from 1 April 2009)

Section RD 22 of the Income Tax Act has been amended to raise the PAYE once-a-month filing and payment threshold from $100,000 to $500,000.

When prior year total PAYE deducted for all employees is $500,000 or more, an employer must pay PAYE to Inland Revenue twice a month. When total PAYE deducted is less than $500,000, the employer can account for PAYE once a month.

This change significantly increases the number of businesses that can benefit from the increased cash flows that arise from paying PAYE only once a month. Employers that are above the current threshold but below the new threshold can still pay twice-monthly if that better suits their business needs.

Higher thresholds under which FBT is not required to be accounted for in respect of minor unclassified benefits provided to employees (application from 1 April 2009)

Sections RD 45 and 46 of the Income Tax Act have been amended to raise the thresholds for exempting minor benefits from FBT from $15,000 a year per employer and $200 each quarter per employee to $22,500 and $300 respectively.

This change means fewer employers will be required to return FBT on minor unclassified benefits (such as flowers or other small gifts) provided to employees.

Extension for FBT annual filing (application from 1 April 2009)

Section RD 60 of the Income Tax Act has been amended to further broaden annual filing for FBT to include closely held businesses whose FBT liabilities are restricted to one or two vehicles used by owner-employees, regardless of their annual PAYE deductions.

The change is intended to ease cash flow and reduce compliance costs for qualifying businesses.

Higher FBT annual filing threshold (application from 1 April 2009)

Section 61 of the Income Tax Act has been amended to raise the FBT annual filing threshold from $100,000 to $500,000.

When prior year total PAYE deducted for all employees is $500,000 or more, an employer providing fringe benefits to employees must account and pay for FBT to Inland Revenue quarterly. When total PAYE deducted is less than $500,000, the employer can pay and file annually instead.

This increase will mean fewer FBT returns and payments will need to be filed by small businesses, thereby easing cash flows and reducing compliance costs for eligible employers.

Reduction in the provisional tax uplift rate (application from 1 April 2009 to provisional tax payments for the 2008-09 and 2009-10 income years payable after this date)

Sections RZ 3 and RZ 5 of the Income Tax Act have been amended to reduce the standard method uplift for the calculation of provisional tax liability for the 2008-09 and 2009-10 income years.

Provisional tax is based on payments of tax being made during the income year. One of the standard methods of calculating provisional tax is by basing it on taxpayers' residual income tax (RIT) from prior years, specifically by assuming that it is either:

• 105% of the previous year's RIT; or
• 110% of the next preceding year's RIT (for taxpayers that have not yet furnished their previous year's income tax return).

The new rules reduce the "uplift" rate to reflect the likelihood of reduced profits in the 2008-09 and 2009-10 income years as a result of the economic downturn. Accordingly, for remaining provisional tax payments due for the 2008-09 and 2009-10 income years, the 105% and 110% uplift rates have been temporarily reduced to 100% and 105% respectively.

It should be noted that changes made to provisional tax for individuals in respect of the 2008-09 and 2009-10 income years (as a result of the reduction in the top income tax rate for individuals) must also be taken into account. See Table 1 below.

In addition, 30% tax-rate taxpayers (eg, companies) were previously allowed to use uplift ratios of 95% or 100% (as a result of relief provided following the lowering of the company tax rate from 33% to 30%). The rules now allow such entities to use new uplift ratios of 90% or 95% (instead of 95% or 100%) for remaining provisional tax payments due for the 2008-09 and 2009-10 income years when the higher 33% rate is used as the base year. See Table 2 below.

These changes will reduce the size of taxpayers' provisional tax payments, giving them greater cash flows over the next two years (as a result of lower provisional tax payments). The standard uplift rates of 105% and 110% will apply again in the 2010-11 and future income years.

Table 1: Changes for individuals

Table 2: Changes for companies and those taxed as companies

Further information on provisional tax, including practical examples that include the above changes, can be found in the Inland Revenue guide IR289 Provisional tax: A guide to understanding your provisional tax. This guide was updated in May 2009 to incorporate the changes included in the new legislation.

Higher provisional tax use-of-money interest safe harbour threshold (application from the 2009-10 income year)

Section 120KE of the Tax Administration Act 1994 has been amended to increase the provisional tax use-of-money interest (UOMI) safe harbour threshold from $35,000 to $50,000.

This makes it easier for more individual taxpayers to use the standard uplift method of calculating provisional tax rather than estimating, thus reducing compliance costs for those taxpayers and reducing their exposure to UOMI interest.

Higher goods and services tax six-monthly return filing threshold (application from 1 April 2009)

Section 15 of the Goods and Services Tax Act 1985 has been amended to increase the threshold below which GST returns can be made six-monthly from $250,000 to $500,000 of taxable supplies in a 12-month period. Taxpayers with more than $500,000 of taxable supplies are required to make two-monthly GST returns.

Taxpayers with highly seasonal activities and small businesses may find this change helpful.

Higher GST payments basis threshold (application from 1 April 2009)

Section 19A of the Goods and Services Tax Act has been amended to raise the threshold below which GST may be accounted for on a payments basis from $1.3 million to $2 million of taxable supplies in a 12-month period.

This change will allow more taxpayers to account for GST on a payments basis and may assist cash flows as GST will generally only need to be accounted for on the receipt of funds rather than upon issue of an invoice. Using the GST invoice basis is still optional for all taxpayers.

Higher GST registration threshold (application from 1 April 2009)

Section 51 of the Goods and Services Act has been amended to raise the GST registration threshold from $40,000 to $60,000 of taxable supplies in a 12-month period.

This change means those under the threshold can opt out of the GST system, resulting in lower GST compliance costs and fewer cash-management problems associated with making GST payments. Taxpayers who meet the criterion of a taxable activity will still be able to register for GST on a voluntary basis if they fall under the revised threshold.

Minor remedial matters (various application dates)

A number of minor remedial matters relating to changes made by the Taxation (Urgent Measures and Annual Rates) Act 2008 have also been introduced. They amend sections RD 50, 52 and 53 of the Income Tax Act 2007 and section 3 of the Tax Administration Act 1994.