Tax changes

By - , Build 155

Next year, proposed changes to withholding tax and provisional tax affecting the building industry will be legislated. As some are significant, now’s the time to get familiar with what they’ll mean to your business.

AS PART OF Inland Revenue’s tax transformation programme, the government is proposing changes to provisional tax and withholding tax, along with other changes to simplify tax for small to medium businesses.

Inland Revenue concerned with tax compliance

Some changes will impact on the building industry, as Inland Revenue (IR) has made no secret of the fact they are concerned at some tax compliance matters in the sector.

A detailed issues paper was released by IR in April 2016, although the changes are not likely to take effect until 1 April 2017.

The key proposals relate to withholding tax and provisional tax. Some of the changes to provisional tax are fairly major.

Withholding tax

Proposed changes relating to withholding tax:

  • Extending withholding tax to all labour-hire contractors, not just specific industries such as labour-only building work, for example, to include IT contractors and contract accountants. The withholding obligation falls to the company paying an individual. This is designed to apply more widely than currently, as many self-employed use a company structure so that they are not subject to withholding tax. At present, withholding tax does not apply to payments made to companies.
  • Allowing contractors to select their own rate of withholding tax to better match their expected tax charge for the year. This would be subject to a 10% minimum withholding tax rate. Default rates will apply if no rate is selected. A building contractor, for instance, may know their annual level of income and deductions and ensure they pay the correct amount of tax when they earn the income.
  • Allowing contractors not subject to withholding tax to voluntarily have tax withheld. The consent of both the contractor and the payer will be needed.
  • Non-resident contractors minimum rate would remain 15%.
  • The non-deduction rate will be 45%.

Provisional tax

Proposed changes relating to provisional tax:

  • Removal of the monthly 1% late payment penalty on overdue income tax, GST and Working for Families Tax Credit overpayment debt. The current initial 1% and 4% late payment penalties will remain. This is expected to reduce the effective rate of penalties and interest from 27% per annum to approximately 15% per annum in the first year.
  • Permitting IR to disclose serious tax debts to credit reporting agencies. Serious tax debts will be defined as either being overdue by a certain period of months or new debt that is greater than a certain threshold.
  • Permitting close companies to make a private use adjustment for motor vehicles used for both business and private purposes instead of subjecting them to the FBT regime.
  • Increasing the threshold for the self-correction of minor errors from $500 to $1,000.
  • Removing the 5,000 km limit for use of the IR mileage rate by self-employed persons.
  • IR setting on optional per square metre rate for the business use of home premises, covering utilities and other costs with the exception of mortgage interest, council rates and rent. This will continue to be apportioned based on actual expenditure.

Extra burden for businesses

Changes to the existing withholding tax rules are generally welcome, but the extension to all labour-only contractors will push an additional compliance burden onto businesses. Details of how these changes will work with the current shareholder salary rules are also lacking.

 

Note

This is intended as general advice only.

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