Provisional tax is the business equivalent of PAYE on wages and salaries with one significant difference.
PAYE is levied on money actually earned, provisional tax is paid on a best guess of what will be earned and there are financial penalties if your income is higher than expected.
That means businesses are caught between the rock of paying more in advance than they need to by overestimating their projected earnings, and the hard place of paying the penalties if they underestimate their end of year’s financial situation.
It’s not easy for any business to accurately predict its income and it’s particularly difficult for primary industry where the weather and markets can vary so much but the government has announced two changes to provisional tax today which will reduce the costs:
* Removing the 5% “uplift” rate that businesses pay in advance on provisional tax instalments throughout the year. To calculate the provisional tax they must pay in any given year, most businesses use the previous year’s income and add 5% to cover likely growth in the new income year – this 5% uplift will be removed for the rest of this year and next year.
*Reducing the “use of money” interest rates on underpaid and overpaid tax. The rate for underpayments will reduce from 14.24% to 9.73% and the rate for overpayments will fall from 6.66% to 4.23%. These changes will apply from March 1 2009.
These and other measures announced in the small business relief package are, as the NBR says more evolution than revolution but what else can they do?
The domestic constraints on business have been evolutionary too and there is no fast or simple remedy for them. Added to that is the global financial situation which will impact on us but is beyond any government’s control.
However, while the measures announced today may be relatively small they are significant in that they show we at last have a government that understands the importance of businesses and is prepared to cut some of the ties which have been holding them back.
There’s a story about a man wandering along a beach littered with starfish stranded when the tide went out.
He comes across a boy throwing them into the sea and says, “There’s so many nothing you do will make a difference.”
The boy bends down, picks up a starfish, throws it back and says, “I made a difference to that one.”
The government must feel it’s facing a similarly impossible task, but Keeping Stock says today’s measures have made a difference to him.