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A WORLD WITHOUT TAX – POSSIBLE?

A world without tax? Not quite, but the proposals put forward by the New Zealand Institute of Chartered Accountants (NZICA) in its recently released paper, 'Simplifying the Taxation of Small Business in New Zealand' are recommending something close for many businesses in New Zealand.

NZICA is of the view that "a simplification of rules would create an environment that is more conducive to business growth and productivity.... if the GST base could be used as a basis for calculating and paying income tax, then income tax compliance costs will be largely absorbed into existing GST compliance costs". The proposals in the paper are two-fold.

First, a business with no employees, a turnover of less than $60,000, and that is unregistered for GST (micro business) would be subject to a final income tax rate of 14% if not a trader, and 7% based on business turnover if trading in goods (such as retailers), which would include Accident Compensation
Corporation levies. Tax payments would be made monthly or at any time. Micro businesses would not be required to file returns. Income for the purposes of social policy commitments (child support, student loans and working for families tax credits) would be 50% of gross income. Finally, it is proposed that for micro businesses the income would be transferred to the taxpayer's summary of earnings and no further income tax on this business income would be payable.

Secondly, a business with a turnover of less than $600,000, that is GST registered and may have employees (small business) would calculate income tax on a cash basis on the GST return and this would be essentially a final tax. Small businesses that trade through a company or partnership would be taxed like a sole trader by taxing the entity based on the personal marginal tax rate structure. Transactions, such as dividends and salaries, between the business entity and its owners would be eliminated. A small business company would not need to maintain an imputation credit account. Income tax and GST would be calculated and paid two monthly. Trading stock and plant equipment purchases would be deducted on a cash basis. There would be no provisional tax, fringe benefit tax or entertainment tax for small businesses. There would be no balance date and square up issues such as stocktakes.

How it affects you

NZICA Tax Director Craig Macalister has said the proposals would mean no more than one hour, one return and one payment each month for income tax and GST compliance. While this sounds good, the devil is in the detail. We will keep you posted on where these proposals go.

SELLING A BUSINESS – GST ISSUES TO CONSIDER

As a result of the changes to GST that have seen the zero-rating of supplies that wholly or partly include land, an issue has arisen as to how this affects the sale of a business. On 31 May 2012, the Inland Revenue Department (IRD) released a statement on the GST treatment of transitional services (such as vendor assistance with business operations for a period of time) where those services are provided by the vendor as part of the sale of a business (that includes the supply of land).

The statement notes that whether transitional services provided by the vendor as part of a sale of a business that includes land will be zero-rated will depend on whether the transitional services and the business/land are part of the same supply.

Most often the business and related land will be part of the same supply. Transitional services will also be part of that same supply where they are not stand alone services in themselves, but rather are a means of better enjoying the business supplied.

This will include situations where the transitional services provide merely ancillary, incidental, minor or peripheral benefits and are not in any real or substantial sense part of the consideration for which the payment is made. Whether the transitional service are separate services for the benefit of the recipient is a question of fact that must be determined in each case.

So where is the line drawn. In the case of British Airways the supply of food and beverages was not necessary or essential to the supply of air transport but was merely an optional extra. The food and beverages were an ancillary, incidental, minor, or peripheral element of the transaction. In CEC v British Telecommunications, the car and the delivery of the car was a single supply of a delivered car. In Dr Beynon v CEC, the personal administration of a drug (such as a vaccine) by a doctor was a single supply of medical services.

The IRD says that where an agreement includes the sale of the land and a building where the business is located and also includes a requirement that the seller will be on-site for a week from the day of transfer, to show how the business operates, to answer any questions, and to facilitate a smooth transfer of the business, this would be zero-rated. If the seller was to manage the business for an initial period of 12 months, this would be a separate supply and not zero-rated.

How it affects you

If you are selling a business, contact your tax advisor to discuss the GST treatment of the sale to ensure you get it right. working day.

POINTS OF INTEREST…

The Companies Office is reintroducing the annual return fee. The fee will be $45.

The last date for purchasing 2011 tax payments from a tax pooling agent is 75 days after your terminal tax date. For most taxpayers, that will be 22 June 2012.

The annual CPI adjustment to the excise and excise-equivalent duty rates on alcohol products will take place on 1 July 2012.

The Alcohol Advisory Council Levy Order 2012 (2012/102) sets out the amount of Alcohol Advisory Council levy for the 2012/13 financial year for each of three classes of liquor.

TO THE POINT…

"When there's a single thief, it's robbery. When there are a thousand thieves, it's taxation."

Vanya Cohen

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