Worried about tax compliance? Here’s good news

Following consultation with business groups, Inland Revenue is introducing the Accounting Income Method (AIM) from April 2018. Craig Hudson explains what this means for small business’ tax obligations.

If you’re one of New Zealand’s 515,000 small business owners, do you find yourself at your kitchen table most Sunday evenings sorting out your paperwork and worrying about making your next provisional tax payment?

For many smaller companies, paying provisional tax is stressful when their income is unpredictable. But take heart: you’re not the only small business dealing with tax and compliance issues – 97 percent of businesses in New Zealand have either no or fewer than 20 employees. And yet, you make up almost a third of the country’s GDP.

However, the provisional tax system and many of the regulations that govern how you run your business, were designed for much larger businesses that have more predictable income flows and entire accounting departments to manage the daily inflows and outflows.

We have been talking to small-to-medium business owners about compliance costs and whether they are excessive for small businesses. A quarter of small and medium businesses say that government compliance takes up too much of their time and is the area of most concern for their business.

The good news is help is on the way.

Following consultation with business groups, including Xero, the Inland Revenue Department is introducing Accounting Income Method (AIM) from April 2018. It allows businesses with a gross income of less than $5 million to pay their provisional tax as they go and it is structured to work with accounting software.

This is a huge breakthrough for a number of reasons. Firstly, more and more business owners will be able to get their accounts off the kitchen table and into an accounting software package. We and the IRD know that business owners want a tax system that is integrated into accounting software.

AIM’s integration into accounting software will make accounting for and paying tax easier and more aligned to the ebb and flow of a small business. If the business is making an accounting profit, it makes a payment; no profit, no payment.

Finally, AIM will give the business owner greater visibility of their tax liability during the year. It will take the stress out of meeting provisional tax payments, currently sometimes ahead of receiving any income.

Another area of our focus is helping small business streamline, by setting a standard for e-invoices.

Our research shows on average it costs a small business $31 to receive a paper invoice; and even more if the original invoice is queried. 

It’s time to take a leaf from all the learnings of digital banking and apply them to the electronic distribution and payment of invoices. Australia is ahead of New Zealand in this regard, and we’d benefit from catching up.

Most businesses already have the digital tools to enable an e-invoice. The only real barrier now to universal e-invoicing is the variety of billing and accounting systems. But this can be easily overcome with a standardised e-invoice. A standardised e-invoice, mandated and adopted by central government, would go a long way towards removing further unnecessary costs from small to medium business.

We estimate that 150 million invoices are issued every year in New Zealand. We have done the maths and estimated an e-invoice costs around $9 in total. Widespread and Government-mandated e-invoicing could therefore save business owners and the country as much as $4 billion in compliance costs.

In our view, e-invoicing and AIM are two more steps on the path towards helping businesses thrive through reducing compliance work and easier interaction with Government agencies.

Craig Hudson is New Zealand Country Manager for Xero.