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Key changes for small business

Government focuses on tax changes to increase cashflow

It’s fantastic to see the New Zealand Government putting words into action with a number of initiatives included in the Taxation Bill being introduced this month and coming into effect on 1 April 2009.

NZ Herald: Tax Changes – the details

Video: John Key’s announcement yesterday.

These initiatives will improve cashflow, as well as reduce compliance costs and effort for many small businesses. Let’s look at what these changes mean and what you need to do.

1. Provisional Tax changes

Provisional tax payments will now not assume growth – dropping from 105% to 100%. This reduces the possibility of tying up cash by making provisional tax payments to a level that that would not be required. This move also frees up cash when you are growing your business, as you only have to pay instalments based on historic results.

This builds upon the recent changes to provisional tax payment dates, rewarding companies that have their accounting up to date, and can accurately estimate their taxable income ahead of their final provisional tax instalment due in early May, ie. they only have to pay what they actually owe.

Now more than ever, having your numbers up to date will improve your cashflow so you can estimate your tax payments more accurately.

In Xero we recommend your accountant reviews your provisional tax payments and then loads these payments as an Accounts Payable entry into Xero, ensuring you have visibility of this cash outflow on your dashboard.

2. Reduction in use of money interest rate

Sensibly, if you underestimate your tax the penalty interest rate is reduced from 14.24 to 9.73% effective from 1 March 09. That is still not money well spent, and expensive money, so you’re best to keep your accounting up to date so you pay the right amounts.

3. GST payments threshold

The threshold for businesses paying GST on a Payments basis will increase from $1.3 million to $2 million. So businesses with less than $2m in revenue can now pay GST on a cash basis; you only have to pay GST when you have the cash.

Xero tracks your accounting transactions on both an invoice and a cash basis. You can see immediately if this change has an impact on your business by simply changing your GST basis to ‘Payments Basis’. Your accountant can assist you with this to see if you should change.

4. Hold onto PAYE for an extra fortnight.

The threshold for monthly filing and payment of PAYE payments has been increased from 100,000 to 500,000. This reduces administration for small businesses and gives them the benefit of holding the cash within their business for longer.

However, we are concerned that as the payment will be more significant, there is the potential for small businesses to get into trouble by not managing these larger payments and using that cash for other purposes.

We suggest putting a dashboard watch on your PAYE liability account so you are aware of the cash required.

Xero help: How do I pay wages to employees and PAYE to Inland Revenue?

5. Fringe Benefit Tax

The annual FBT filing threshold will be increased from 100,000 to 500,000, meaning less admin work, but again please be mindful of the larger annual payment.

6. Government departments must pay on time

John Key announced that all Government departments must pay their bills in a timely manner and no later than the 20th of the following month.

It’s great to see leadership by example. Living in the IT hub of Wellington we know how frustrating it can be for IT services companies to be paid from Government, so this is an excellent policy. We hope small businesses also work to this principle of good and respectful business.

Are any software changes required?

If you are not using Xero, check with your vendor to find out if you need to get a new version of your software as some accounts preparation software may have provisional tax uplifts hardcoded.

Summary

We applaud the Government for listening and understanding the importance of cashflow for small businesses.

Here are some other resources that may be useful:

Please feel free to share any other suggestions you think of in the comments.

 

Read more about Business, New Zealand, Small Business

 

5 comments

Andrea
5 February 2009 #

Thanks Xero for such a great summary. You’ve transcribed the Govt’s timely initiatives into points which are relevant and incredibly easy to follow. You’ve also saved me from having to read the full media version of the announcement – cheers!

Thanks for the commentary Xero.
Some positive intent from the Government is good to see. A lot of these measures will result in changes in the timing of tax payments, but will not alleviate the ultimate tax burden. The UOMI interest rate is still on the high side, but this seems to be an IRD strategy to ensure IRD are not utilised as a bank. Our clients mitigate this by taking advantage of tax pooling through an intermediary so there are further interest savings to be made here. It is pleasing to see the GST payments basis threshold being lifted to $2.0m. We are also impressed with the removal of the capital/revenue distinction for legal fees below $10k. The other changes we see as relatively insignificant to the majority of SME’s in NZ. We look forward to further Government initiatives to come in the near future.
Thanks from Openside

Hamish Edwards
5 February 2009 #

These are a series of very sensible and I must say long overdue changes that will have a useful impact on the cashflow of small businesses. Well done NZ Government.
However, it is still very important to plan your tax payments. When you know what they are, I suggest entering them in through Accounts Payable in Xero. If you are forecasting, then enter the amount you think you will have to pay, then adjust it once you know the definite number. This will also help to make sure you do not missed the due dates for the payment of taxes.

[...] The Government is considering the changes in the December 2007 discussion document, “Reducing tax compliance costs for small and medium-sized enterprises” but there are no further details.  We expect we’ll see incremental changes as per the last changes in February. [...]

Online Accounting
22 November 2012 #

Great post. Cloud accounting software is basically a way to run your small business accounts entirely online without the need for offline storage or applications. So there is no native install on your own computer and you can access your accounts from anywhere with an Internet connection.Thanks for sharing…

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