Tax simplification is IRD’s stated goal, aimed at reducing compliance costs. But is it saving us money and improving business cashflow?
There is no doubt that capturing and coding business data is faster and more convenient than ever before, but there are unexpected consequences.
Cloud Accounting Technology
Technology has been a game changer in most industries, including accounting and tax compliance.
User friendly accounting software, such as Xero, allow book keepers and small business owners to code day to day transactions in real time. Bank feeds capture bank and credit card transactions automatically making reconciliations a breeze.
Popular cloud based accounting programmes allow the external accountant to review transaction coding remotely, and filing GST returns with IRD is just a mouse click. GST payment by internet banking makes the whole process quick and slick.
Payroll has traditionally been time consuming and complex. But payroll technology now allows pay runs to be processed accurately and quickly, especially with electronic time sheet integration. Employee portals automate leave requests and allow 24/7 access to employment data.
PAYE deductions are calculated automatically, pay slips created and emailed to employees, and payroll payment batches exported direct to internet banking. PAYE returns can be downloaded and e-filed with IRD using MyIR portals. What used to be time consuming has been streamlined and simplified.
IRD is innovating by updating its tax platforms. MyIR’s GST platform was rolled out in April 2017, and 2018 will see further improvements.
Provisional Tax and Use Of Money Interest
Use of money interest on underpaid provisional tax is costly for businesses, especially seasonal businesses. Businesses with “lumpy” turnover, or large receipts late in the income tax year, have historically been charged costly use of money as IRD expect three equal provisional tax payments throughout the year, regardless of when the income is earned.
A recent law change means use of money interest is now calculated from the third provisional tax payment, rather than the first. This is a welcome respite from the punitive regime.
While the provisional tax ratio method offers a “safe habour” from use of money interest, it is a blunt instrument. Tax payments based on the previous year’s average profitability ratio often result in substantial over or under provisional tax payments.
Accounting Income Method (AIM)
Improved real time accounting software has paved the way for the new Accounting Income Method (AIM) for calculating provisional tax. AIM will be available for eligible businesses with turnover less than $5m from 1 April 2018. Under AIM provisional tax will be calculated using up to date earnings data from the business’s accounting software and provisional tax will be paid either monthly or two monthly, rather than three payments a year in arrears.
For growing businesses AIM will both bring forward provisional tax payments and increase the amounts payable. However, for businesses with declining profitability AIM will provide relief from the previous methods of provisional tax calculated on the more profitable previous year, as well as spread the tax over 6 or 12 payments rather than the current 3.
While AIM will be optional initially, it is likely to become compulsory in the future.
Proposed “Payday” Changes
With more and more businesses using electronic payrolls IRD have also proposed changes to the current PAYE system.
Businesses with annual PAYE deductions of less than $500k currently pay PAYE monthly on the 20th of the month after deduction from employee’s pay. This effectively gives up to 6 weeks free credit before PAYE deductions are paid to IRD.
New “payday” proposals will require all employers to pay PAYE to IRD within 2-7 working days after each pay run. This is likely to be optional from 1 April 2018, but a requirement after 1 April 2019.
While simpler, the cashflow effect of this proposal will be significantly detrimental for businesses.
Tax Simplification and Business Cashflow
Technology is simplifying day to day book keeping, and changing when and how we pay tax. Real-time accounting systems coupled with IRD’s technology platform innovation is enabling IRD to collect business taxes based on actual data, earlier than has ever been possible before.
In the future, it is possible that businesses won’t even have to file GST, PAYE or income tax returns as automated accounting software may do it for us!
The tax simplification and accounting automation trend will continue. Businesses need to adapt to shrinking tax payment time frames by proactively improving cashflow.