Should SME’s have lower taxes than larger businesses?

12 December 2018

Dealing with taxes is a constant struggle for many small and medium-sized businesses in New Zealand. The current 28 % tax rate is a headache for many smaller businesses, especially since being a smaller business often means that the profit is lower and some of the associated costs relatively higher than those of larger businesses. Smaller businesses simply don’t have the same level of turnover, buying power and bulk buying capabilities that offer advantages to larger businesses.  

The discussion surrounding the current tax system and the possibility of lowering the taxes for small and medium-sized businesses has gone on for a long time. We asked NexGen Director Peter Prema what’s his take on the situation.

“I think having a tiered system similar to personal tax rates would be really beneficial”, Peter says. “It would make it a bit easier for small businesses to grow and it would also leave enough money to reinvest back into your business to grow it.” 

Peter believes that small businesses should be helped to get off the ground now so that they can grow to be more profitable in the future. A lower tax rate would allow businesses to spend more money on buying new equipment or investing on larger premises that can help them to grow. This way more businesses may have a chance to succeed and flourish, which can be beneficial for the whole economy. And as businesses grow and become more profitable, they start paying more and more tax, which balances out the situation.

Lower tax rates could also improve business owners’ financial situation, since having a full-time job would now in many cases be more profitable than owning a business. With the tax rate being so high, there is also a risk that it scares away some would-be entrepreneurs.

It’s a fact that most new businesses fail during their second year, partly because that’s when all the taxes hit them. If businesses aren’t well-prepared with good savings and they haven’t been keeping on top of their taxes, they risk running into many cash flow -related issues. Unfortunately, the current tax system doesn’t leave much room for making mistakes. It’s normal that new businesses make some mistakes during their first years, but with the tax rate being so high, these mistakes may end up being very costly or even fatal.

“Everyone in business makes mistakes but with the tax rate being so high you’re going to get punished at both ends”, Peter says.

New Accounting Income Method, AIM, is designed to bring relief to small and medium-sized business owners, but it requires more compliance and document preparation, which can add up. Using AIM also means that you cannot use tax pooling, which doesn’t favour small businesses.

“It’s harder to do that than just pay your taxes the normal way”, Peter says.

Unfortunately, Peter thinks that it might be a while until we see a change in tax rates for small and medium-sized businesses, if at all. Meanwhile he recommends that business owners get a reliable, trustworthy accountant with a proactive attitude. A great accountant can help to stay on top of the taxes and there is always someone to talk to about anything that’s going on in the business. Being smart with money and using it in right areas is important especially if you’re struggling, and people like us at NexGen can help with that.

“We’re growth experts and wanting to grow a small business is key, especially if you want to keep on top of your taxes”, Peter says.