It’s not often that discussions on the provisional tax system generate much excitement but comments from the new Minister of Revenue recently have certainly got tongues wagging.
Todd McLay recently raised the possibility of getting rid of provisional tax as part of the IRD’s upgrade of its computer systems. There’s little doubt that provisional tax is loathed by a large proportion of businesses. A recent survey by MYOB showed that three quarters of SMEs cited provisional tax as the number one tax bugbear.
Provisional tax is defined by the IRD as a way of paying your income tax as the income is received through the year. Installments throughout the year are based on what you expect your tax bill to be at the end of the year.
Even the IRD are committed to simplifying provisional tax as part of a “multi-year process”. The cabinet have indicated support for any legislative reform. Revenue Minister Todd McLay has indicated that his preference is to work with real time data rather than the crystal ball approach of provisional tax. An approach similar to PAYE may be possible, perhaps aligned with GST.
Provisional tax also places a large cashflow burden on SMEs, typically in their second year of trading. Another common complaint about provisional tax concerns Use of Money interest (UoMI). This is where taxpayers are penalised for underestimating their tax liability throughout the year. Although UoMI can be mitigated through good tax planning, for larger businesses it is almost impossible to avoid.
There are bound to be technical tax reasons that need to be overcome to remove provisional tax so we are not forcasting its dimise in the near future. It is heartening to see that the current administration is committed to doing something about it. We’ll keep you posted with any developments.