Instant business tax payment and refund

Problem: For small business, the cost of paying tax either requires an expensive private subscription to keep records and report, or a lot of time. Not because tax is complicated – it’s 28% on income after expenses and depreciation is deducted – but because there is a lot of 20th century paperwork. In today’s digital economy this is obsolete. Further, the provisional tax is a crude tool that makes no provisions for the ups and downs of business.

Sophisticated businesses can employ accountants and money managers and hold onto their cash as long as possible, using the provisional tax method. But many other small business owners lack both the understanding and the cash to pay professionals and would prefer to pay tax when earned and be refunded tax when they spend.

Solution

Small business owners would prefer a simple system to pay tax on  income deposit and get a tax refund when they pay for deductible goods or services. The business tax rate is flat, thus this can be done by PAYES (Pay As You Earn & Spend): a business bank account that  instantly pays 28% tax on every deposit and IRD instant refund 28% on every deductible expense. 

All it requires is back-end programming by the bank.

Digital money has been in our lives for almost 40 years, the first trial scheme of EFTPOS began in 1984. But in 2023, we still have not made the complete jump to making tax paying easier for SME businesses. PAYE has made it easier for salary and wage workers, but SME businesses have to file an annual return, and then make provisional tax payments for the next. For SME businesses with stable cash flow it works, but it is complicated and usually means the business has to pay a tax accountant $1,000 to $5,000 to sort it all. There is a much simpler way.

Proposed: Pay as you earn / Refund as you spend

A business opens a special bank account that has certain automatic tax functions:

1. When taxable income is deposited, 28% tax immediately paid to IRD
2. When expense is debited by bank card or electronic transfer, immediately refund 28% to taxpayer
3. Customer refunds treated the same as an expense – instant refund of income tax to the business
4. When making a capital purchase, the business goes on line and codes it to depreciate
   1. The expense refund is reversed, and a depreciation schedule set up in its place
   2. If the capital item is sold, the system adjusts accordingly and clears the expense
   3. Proposed:  simplify the different classes (years) of depreciation with a $10,000 threshold
5. GST pre-set, with automatic deduction and refund built into the same system for those registered
6. Payroll is part of the online app where all withholding and tax is handled on the employee account
7. Enhancement: contractors must be registered to reduce the tax-evasion economy

If the banks resist, begin by implementing this with the government-owned KiwiBank. When private banks see they will be losing business customers by not implementing their own debit-card and on-line applications, they will voluntarily join.

As a rolling tax-system, as opposed to an annual reset, there are no tax returns. The system is capable of producing a variety of financial statements that can be provided to show business health to lenders, creditors, etc.

Audits

The IRD conducts regular random audits to ensure the expenses are legitimate business expenses and may disallow any deduction, with the interest and penalty automatically applied. The taxpayer may request an independent review (checks and balances) where they believe there was an honest error or the IRD action was unreasonable.

If the business person errs, and uses their business card for a non-deductible expense, they are charged the prime rate of interest, and are allowed one such error per month without penalty, and then are charged a correction penalty fee that increases similar to a no-claims bonus on insurance policies.

Voluntary

Such a system is voluntary. It will not suit all businesses. But for the business person who is good at what they do, but hates the paperwork of taxes, or is in a volatile industry where provisional tax payments are a burden, this makes tax paying very simple. Earn income, the tax is paid as soon as the money hits the bank. Spend money that is a deductible expense, the refund is instantly in the bank.

Bank Participation

It is likely all the banks will go along, but if they are reluctant, start with the government-owned KiwiBank.

Simple changes to back-end software

From a technical standpoint, the back-end software is relatively easy, especially with businesses who pay 28% rather than on the individual tax table. All deposits to the special account have 28% sent to the IRD as soon as they clear. All charges on the special debit card solely reserved for approved business expenses see an immediate refund of 28%. If the business is registered for GST, then GST is deposited and refunded the same way. For zero-rated sales, or non-deductible purchases (for example the taxpayer made a personal purchase but used the wrong card or their accountant advised them it was not deductible), the taxpayer can go on line to their bank account and make the correction. In the event an erroneous purchase was not corrected for say 45 days, the software would automatically calculate an interest charge for using the IRD’s money, also automatically paid to the IRD.