Labour's proposed flexible tax seeks to ease the way for businesses

  • Opinion
  • September 2, 2015
  • Andrew Little
Labour's proposed flexible tax seeks to ease the way for businesses

Many retailers, especially small ones, don’t earn revenue at an even pace all year. Much of retail is a seasonal business and income can vary significantly between summer, spring, winter and autumn.

And it varies each year – if it’s bad snow on the skifields, an outdoor sales retailer is going to suffer.

Unfortunately our tax system doesn’t recognize these issues. Not only do you have to pay provisional tax in regular installments - despite your earnings - you also have to forecast your profits for the year ahead to calculate those installments.

The most common complaint I hear from retailers is that dealing with the IRD is an enormous hassle, especially when it comes to provisional tax. When a company’s cashflow doesn’t match up perfectly with tax, these hassles can even send some firms to the wall.

Labour has announced a new proposal called Flexible Tax for Business for businesses to pay tax while still getting ahead.

We want to get rid of the rigid system where every Kiwi firm has to pay tax on the IRD’s timetable, regardless of how well it fits with their way of doing business. Instead, we want to let our businesses pay their tax when they earn their income.

Flexible Tax for Business provides businesses with the option of setting their own withholding rate and timetable for paying tax as revenue is earned. 

Treating tax payments as a credit against provisional tax liabilities is the key – it brings the tax system for businesses closer to that of employees.  When combined with our other proposals to increase the thresholds before provisional tax is payable and the removal of late payment penalties for provisional tax, it should allow many smaller businesses to manage their affairs so they have no or minimal provisional tax exposure.

Retailers in holiday hot spots are an example of a big winner. Most of them get almost all their revenue in the summer when the rest of us go on holiday. But the IRD demands provisional tax from them in the winter, too, when there’s no revenue coming in to cover it. It doesn’t make sense.

Businesses in different situations can choose to pay tax at different times, decided by them. A simple idea, really. And long, long overdue.

And the best part is that the person who gets to decide when to the pay the tax isn’t the IRD, but the business owner themselves. They can use their new flexibility to help them get ahead, while still paying their tax.

Additionally if a business owner is happy with the current provisional tax model, they can stay with that. It’s their choice.

Why give that power to the businessperson, and not the government? Because business owners know their industry and their cashflow better than the IRD does. That’s why.

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