Provisional tax has long been contentious and complained about by small business owners. A new cloud-based system has been launched to pay it, but tax consultant Terry Baucher says it could be grounded by the same old problems.

A new tax year started on April 1 and with it came a much-touted new option for taxpayers to pay provisional tax; the Accounting Income Method (AIM).  

The Inland Revenue Department (IRD) has been heavily promoting AIM, which is targeted at individuals and businesses with annual turnover under $5 million. The new system came with a big carrot – those using AIM will not be subject to use of money interest if they pay insufficient provisional tax during the year.  

The provisional tax regime attempts to collect tax from liable individuals and businesses during the year; and at present provisional taxpayers with the standard March 31 year end pay provisional tax in three instalments during a tax year (August 28, January 15 and May 7).

How much provisional tax is payable is based on 105% of a taxpayer’s “residual income tax” for the preceding tax year. If the income tax return for the preceding tax year has not been filed (a fairly common occurrence), by the time a provisional tax payment is due then the tax payable is based on 110% of the residual income tax for the year before the preceding tax year. This is the so-called “standard uplift” method.

Although the principle behind provisional tax is reasonable, in practice it has long been the bane of small businesses. One reason is because the existing standard uplift approach doesn’t take into account seasonal fluctuations in income. Furthermore, the penalties for errors resulting in underpayments can be severe; currently, IRD’s use of money interest rate for underpaid tax is 8.21%. Ouch.

In addition, an immediate penalty of 1% of the late paid tax is imposed with a further 4% charge if the tax has not been paid within a week. (Until last year, Inland Revenue also imposed a monthly late payment of 1% of the tax paid late which, together with use of money interest and the initial 5% late payment penalty, meant an effective interest rate of over 26% on late paid tax).  

As a result, taxpayers tend to be very cautious and overpay their provisional tax, an inefficient use of funds given the Inland Revenue rate on overpaid tax is a miserable 1.02%. It was no wonder then that when the discussion document Making Tax Simpler: A Government green paper on tax administration was released in 2015, more than 200 of the 750 comments made on the 17 questions on the Green paper online forum were made in response to a single question about provisional tax.

Enter AIM

Against this backdrop, IRD considers the advent of cloud-based accounting systems such as MYOB and Xero together with its new START (Simplified Tax and Revenue Technology) could offer a better alternative for small businesses. Hence the introduction of the Accounting Income Method. 

It’s available to businesses with annual turnover of under $5 million who have AIM capable accounting packages. The principle is that on each AIM due date (usually the same as the taxpayer’s GST due date) the software calculates the provisional tax due and prepares a statement of activity which is filed with Inland Revenue.

Typically, a taxpayer using the AIM method would make six provisional tax payments. If there’s a fall in profitability, resulting in an overpayment, then a refund can be made in a subsequent period. (Thus, handling the issue of seasonal fluctuations in income). So long as taxpayers make payments in full and on time, no use of money interest or late payment penalties will arise.

All this sounds promising and it’s no wonder that Inland Revenue have been enthusiastically promoting AIM. And yet the reaction from accountants and tax agents towards AIM has been cool, with one describing AIM as a “really, really good idea gone bad”. Why?  

A key reason is Inland Revenue’s unwillingness to accept the principle of “near enough is close enough” (or “materiality” in accountant-speak). As part of the introduction of AIM, Inland Revenue released no fewer than 10 determinations covering how tax adjustments such as for depreciation and private expenditure should be made when filing a statement of activity. These are well-meaning, but add needless complexity and therefore compliance cost. It would have been better to have adopted the approach of regular payments through the year followed by a wash-up calculation.

In placing reliance on the accounting software involved Inland Revenue seems to have overlooked the adage of “garbage in, garbage out”.  With statements of activity required to be filed every two months, accountants and tax agents are nervous that data entry errors early on in a tax year could be compounded as the year progresses. In this regard, it’s interesting to note that Xero is only offering its AIM capable package via its Tax Practice Manager (available only to accountants and tax agents).

Furthermore, AIM’s potential utility as a game-changer was effectively undermined by other changes to the provisional tax regime introduced in April 2017.  These changes made provisional tax easier for smaller businesses and individuals with residual income tax under $60,000. In fact, switching to AIM would probably increase such taxpayers’ compliance costs, overriding the benefit of not being charged use of money interest.

For now, AIM could turn out like the GST-ratio method for calculating provisional tax, which was so circumscribed that according to a Regulatory Impact Statement in 2016 only 2-3,000 taxpayers have adopted it.

This would be a pity, because AIM in principle has much to recommend it. But in order for AIM to be the success Inland Revenue thinks it should be, Inland Revenue will need to adopt a more flexible approach to provisional tax – and penalties as they apply to small businesses.  

The same 2016 Regulatory Impact Statement noted that in the June 2015 year there were over 300,000 taxpayers, with 43% of provisional tax paid by the top 5% of companies. What this indicates is the fiscal risk of loosening the rules around penalties and use of money interest should not be, to use a dreaded word, material.

In any case, Inland Revenue is well aware the current penalties and interest regime is not highly effective in encouraging payment. Victoria University research in 2017 on the effect of the penalty regime on taxpayer behaviour “generally suggested that taxpayers were unresponsive to penalties.”

Given this, it is perhaps no wonder that in its most recent annual report Inland Revenue wrote off a frankly staggering $1.8 billion of uncollectable debt, the majority of which represented accumulated penalties and interest. 

AIM may not yet be the hoped-for game-changer for small businesses provisional tax woes. It has potential to be so with some added flexibility, combined with a rethink of the penalties and use of money interest regime. Whether Inland Revenue will seize this opportunity remains to be seen.

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Wisdom and experience come with age, but these young people are proving to be wise beyond their years. We’ve picked out ten Kiwi business moguls aged 30 years or under that are promising good things for the future of New Zealand business.

We love to perpetuate the stereotype of the slacker millennial, spending hours on end scrolling through social media and whittling away a lifetime’s worth of savings on $22 brunches. But when we look at some of the most exciting businesses in New Zealand today, young people are are often the ones leading the pack. Because what young people lack in experience and expertise, they make up for with enthusiasm, freshness and a whole lot else.

Our previous list highlighted ten amazing women in business, but it’s a list that could’ve gone on and on. This time it’s no different with hundreds of young people promising good things across New Zealand. But ten is a nice round number, so we’ve taken the time to pick out a few young people in business who we think deserve your special attention:

Sam Stuchbury – Motion Sickness

From living in a dingy Dunedin flat to being New Zealand’s sole representative for this year’s Forbes’ 30 Under 30 Asia list, Sam Stuchbury’s already accomplished a lot at just 27 years old.
Along with fellow Otago University alumni Alex McManus and Jono De Alwis, Stuchbury helped establish creative content agency Motion Sickness in 2012 during his final year of study. Six years later (which included a move up to Auckland from Dunedin), Motion Sickness now boasts a slew of high profile clients including Blunt Umbrellas, Burger Burger, Les Mills and Jim Beam. Stuchbury and co. have made a name for themselves as social media gurus, and in 2016, branched out to help co-found The Social Club which links up brands with social media influencers to collaborate on campaigns. The Social Club is the largest company of its kind in New Zealand, working with 3,500 influencers and 350 different brands.

Sian Simpson – Kiwi Landing Pad

Based in the startup epicentre of San Francisco, 26-year-old Sian Simpson has been running Kiwi Landing Pad (KLP) – a work, gathering and mentoring space for New Zealand companies – since 2014. As global community manager and sole KLP employee, a large part of Simpson’s role involves meeting with business owners, connecting them with local networks and facilitating events throughout the year, making her a crucial figure for providing a “soft” landing point for New Zealand in the heart of the Bay Area.
In addition to her work with KLP, Simpson has also been creating videos and interviewing speakers for SaaStr – a website for companies that provide ‘Software as a Service’ – for the last three years. In the past, she’s also worked for the US arm of Kiwi video production company 90 Seconds.

Alexia Hilbertidou – Girlboss

At just 18-years-old, Alexia Hilbertidou’s resume already reads like a lifetime of work. Soon after winning the Unitec Coding App competition in 2015 for online food redistribution platform KaiShare, 16-year-old Hilbertidou founded GirlBoss NZ – an organisation encouraging young women to embrace STEM, entrepreneurship and higher leadership. She was inspired to create GirlBoss when she noticed she was the only girl in her Year 12 IT and physics class at Albany Senior High.
More than two years later, GirlBoss has become New Zealand’s second largest network of women with nearly 8,000 members. It primarily targets high school students through workshops and presentations on leadership, entrepreneurship, science and technology, with past speakers including My Food Bag’s Theresa Gattung, Xero’s Anna Curzon, Green Party MP Chloe Swarbrick, and Prime Minister Jacinda Ardern.
Between all that, Hilbertodou’s also managed to make time to intern at the New Zealand Treasury, win a 2016 Westpac Women of Influence Award, receive a scholarship from the Ministry of Education, and become the youngest person ever to go on a project mission with NASA.

Jamie Beaton & Sharndre Kushor – Crimson Education

When you think of smart, young entrepreneurs from New Zealand, most people’s minds will think of the pair behind Crimson Education. Launched in 2013 when Jamie Beaton and Sharndre Kushor were still in their teens, the Auckland-based global consultancy that helps people gain scholarships to Ivy League schools has since worked with over 20,000 students and is worth more than $200 million. Crimson employs more than 2,000 tutors and mentors from around the world with locations in places like Australia, Vietnam, Thailand and Russia.

In between building their multimillion dollar education empire and providing mentoring/tutoring services to students themselves, both Kushor and Beaton have achieved notable success with their own education and careers. Shortly after setting up Crimson, Beaton went on to study maths and economics at Harvard University while working as an analyst at Tiger Investment. Currently, he’s studying towards an MBA and Masters in Education at Stanford University, and is set to study at the University of Oxford next year as a Rhodes Scholar. Kushor went on to study health sciences at the University of Auckland and serves as a director at multiple education-based organisations such as MedView, Play Atlantic and NumberWorks’nWords.

Donielle Brooke – Designer Wardrobe

When Donielle Brooke was 25, she was diagnosed with thyroid cancer which drained her energy and left her bedridden for a year. With bills to pay but unable to work, she started selling a bunch of her designer clothes online. She set up a Facebook page – Designer Wardrobe – which, in a matter of days, attracted hundreds of members as a place to virtually sell and buy designer goods. Designer Wardrobe had clearly hit a nerve, thriving on people’s love for pre-loved fashion.

After mostly recovering from her debilitating illness, Brooke went on to grow Designer Wardrobe into a business force to be reckoned with. It now boasts more than 100,000 members and a board consisting of big names like Spark chief executive Simon Moutter and GrabOne founder Shane Bradley. It’s migrated to a dedicated website which brings in over 1.2 million page views a month. It even has a physical location now in the Auckland suburb of Grafton where people can go and rent outfits for special occasions. Last year, it had its biggest financial success yet, raising over one million dollars via equity crowdfunding platform Snowball Effect.

Shay Wright – Te Whare Hukahuka

In 2016, Shay Wright, then 27 years old, was named as part of Forbes’ 30 Under 30 Asia list in the Social Entrepreneur category. He was listed for his work with Te Whare Hukahuka (The House of Innovation), the organisation he co-founded with Travis O’keefe in 2015 that aims to help iwi and other Māori organisations create or grow profits from their assets and offer training and education to local Iwi leaders.
Wright has been involved in developing strategies for the Māori unit at The Icehouse, Māori trusts embarking on new growth projects, the initial Callaghan Innovation’s Māori Engagement Strategy, and the Government’s Māori Economic Development Advisory Board. Wright was also a finalist for the 2016 Young Enterprise Alumni Award, and the 2017 Young NZ Innovator Award and Matariki Young Achiever Award.

Madeleine Harman & Jessica Grubisa – Harman Grubisa

Madeleine Harman and Jessica Grubisa first met while studying fashion at Whitecliffe College of Arts and Design. They later went on to launch Harman Grubisa in 2014 and become a rising star of New Zealand’s fashion scene.
The pair, now in their late 20s, have gone on to win international awards with five-figure cash prizes, open New Zealand Fashion Week to join the ranks of Kate Sylvester and Trelise Cooper, and expand into more than just clothes with a range of footwear and jewellery on offer now as well. Their most recent big break was having their clothes worn by Prime Minister Jacinda Ardern for her feature article in Vogue magazine.
In between all that, they both still work on the floor of their Jervois Rd boutique, dealing directly with customers while their studio sits upstairs.

Ezel Kokcu – Passphere

At 24-years-old, Ezel Kokcu is already a seasoned entrepreneur. Last year, she launched Passphere, her third start-up, which gathers analytics and information on visitors at events which can then be used as a marketing tool for organisers. It builds on her two previous ventures, Non-Stop Tix, a ticketing start-up, and STQRY – an app that allows people to discover museums and events in their area that match their interests. STQRY (which is now known as Area360) was a particular success, raising $5.5 million in capital before Kokcu decided to sell it off. Not bad for a university dropout.

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