The Need to Simplify the Tax Laws for Small Businesses in New Zealand - Research Proposal Example

The need to simplify the tax laws for small businesses in New Zealand Customer Inserts His/her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name Date DECLARATION I hereby declare that this research proposal is my original work and has not been presented to any other college or university for certification. Name: Signature………………………………………. Date: ………………………………………. APPROVAL The undersigned certify that the supervisor has read trough, accepted and recommended to the department of accounting for the acceptance of the dissertation. Submitted by: Signature: …………………………………. Date: …………………………………... Internal supervisor: Lecturer, Accounting Department Signature: …………………………………….. Date: ……………………………………… ACKNOWLEDGEMENT I humbly express my sincere appreciation and thanks to all those who assisted me in all ways towards accomplishing my dissertation. I am particularly grateful to my supervisor ………… for the support and continuous guidance in write up. Table of Contents 1 DECLARATION 2 APPROVAL 3 ACKNOWLEDGEMENT 4 Table of Contents 6 References……………………………………………………………………………….22 6 7 Abstract 7 CHAPTER ONE 8 Introduction 8 References……………………………………………………………………………….22 Abstract There is a need to simplify tax for small business in New Zealand. This report aims to come up the proposals to reduce tax compliance costs for small business taxpayers who have substantially active business income. Typically a small business is categorized by the number of people it employs. This paper does not measure a small business by the number of employees it has, but rather by its levels of turnover. This paper targets business activity that is operating on a very small turnover scale which we will term as “Micro Business Taxation” proposal. This paper also will capture those small businesses whose turnover is up to $1.2m which we will term as “Small Business Taxation” proposal. This research will involves all stakeholders in the business field who have significant influence in the constitution formation and implementation. This research will seek to accommodate the diverse views of all participants within Micro Business and Small Business. The purpose of this paper is to help determine whether there is a mood with both policy makers and small business owners to tackle tax compliance costs: because we believe our proposals could help cut income tax costs for small businesses by approximately a quarter to a third. CHAPTER ONE Introduction This research intends to provide a fresh look at the way New Zealand small businesses calculate and pay tax. The paper is designed from the small business owner’s point of view and aim to make business income tax compliance simple and practical. Background In a nutshell, the tax process for small businesses in New Zealand is convoluted. The framework for taxing small business dates back to the 19th century, and while conceptually straight forward, it has been modified and amended so many times that it is now at the point when taxpayers need to be very tax literate to correctly comply. But taxpayers do not go into business to learn about tax and how to fill out forms. Taxpayers now face elaborate processes when it comes to complying with tax laws. While the study of small business compliance costs has done much to add to our knowledge on what they are and how they impact on small businesses and the economy, little has been done to address how small businesses can better manage the tax process from start to finish. Rather than sit on the sideline and snipe at Government to do something, we have decided to put this paper together as a constructive think piece to raise awareness and promote thought and discussion on some fresh approaches to tackling the ever wearisome tax compliance burden for small business. It exist a substantial material in public domain on this topic that aimed principally at taxpayers with active business income, the small business taxation model substantially simplifies taxation of income tax and fringe benefit tax (and GST to a lesser extent) by effectively putting small business on a cash accounting system for income tax, merging the GST and income tax obligations, eliminating FBT and entertainment taxes and simplifying some deductions such as depreciation. The taxation of companies9 is further simplified by merging company and shareholder taxation. This research will in many ways contribute to the field. Among the key areas that this research will construct is the compliance burdens, record keeping requirements that the entity would not need to comply with rules in relation to income tax filing, expense deductibility (including entertainment tax), balance dates adjustments, FBT and ACC levies. Research objective It is well known that the complexity of a tax system has a detrimental effect on an economy. The objectives of this research are: To come up guidance policy that increases voluntary compliance, To come with frame that reduce administrator error To check and come up with proposal that eliminates area that is perceived by taxpayer to be unfair. To indentify and make proposal on those are area that undermines the integrity of the tax system. To reduce economic drag on business that diverts resources away from the most productive use. Research question Does the tax system easy to administer and comply with? Does the tax compliance burden proportionate to the business size? Are the tax liabilities certain to small businesses? Is the trade-offs favor compliance friendliness? Do the tax and compliance burdens adhere to principle of fairness? Purpose of the research The purpose of this research is to help determine whether there is a mood with both policy makers and small business owners to tackle tax compliance costs: because we believe the finding from this research will help cut income tax costs for small businesses by approximately a quarter to a third. CHAPTER TWO Literature review Modern taxation systems have the capacity to impose a heavy burden on taxpayers, and particularly on small business taxpayers. That burden typically consists of three elements. In the first place there are the taxes themselves, whether they are taxes on the profits, the products or the employees. Secondly, there are the efficiency costs (variously referred to as deadweight losses or excess burden), involving tax-induced market distortions. And finally there are the operating costs of the tax system: the costs to the government (ultimately borne by taxpayers) of administering and collecting the taxes (usually referred to as “administrative costs”), and the costs expended by taxpayers in complying (or sometimes not complying) with their tax obligations (usually referred to as “compliance costs”). The first two of these costs – the tax itself and the efficiency costs – are well recognised in the economic literature, and have been the subject of extensive debate and research over the years. But, until relatively recent times, there has been far less written about the operating costs of taxation systems. This is a little surprising when one considers that much of the focus of Adam Smith’s four canons of taxation expounded in the Wealth of Nations (1776) was on the need to minimise the operating costs involved in raising tax revenues. It is interesting to note that of Smith’s four ‘canons’ of taxation, usually summarised as equity, certainty, convenience and economy, two were wholly concerned with tax compliance costs and one partly so. But after many years of relative neglect – so much so that Sandford (1973) was able to refer, in the 1970s, to compliance costs as the “hidden” costs of taxation – the topic of the operating costs of taxation has been an area of taxation research that has flourished. There have been more than 100 published studies into either compliance costs or administrative costs (or sometimes both) since Haig’s tentative first modern study (1935) in the United States; and more than 60 of those have occurred since 1980. Studies have now occurred in most developed and many transitional and developing countries, have utilised most of the research methodologies that are available and have encompassed the full range of taxes and tax issues. New Zealand’s tax system was once a fairly straight forward affair, but over the years it has become increasingly complex. In the 1970s there was a single volume of income tax legislation and paid provisional tax twice a year. Following reforms such as fringe benefit tax, goods and services tax, international tax, imputation, and resident withholding tax, to name a few, there are now four large volumes of tax legislation. Although the flatter 33% tax rate structure the businesses enjoyed in the 1990s provided compliance benefits, these have been long since been eroded with the increase in the top personal marginal tax rate, which until recently was 39%. On top of a misaligned tax rate structure, there have been layers after layers of patches and band-aids added to try and prop the tax system up and keep it running as intended. Further components of our tax system that add complexity are the linkage to the delivery of some social assistance measures through the tax system and some of the behaviour drivers this creates3. The introduction of harsh penalties, use of money interest charges for errors, and a costly disputes system, has heightened taxpayer’s awareness of the complexity of our tax system and contributed to people’s dissatisfaction with our current system. Simplicity is regularly identified as a goal for our tax system, but it is all too rarely achieved. Too often the rhetoric of tax simplification accompanies various legislative amendments, but then quickly becomes more symbolic than real when the level of tax compliance costs fails to track downward. As many people, including policy makers, are well aware, New Zealand business is largely comprised of small sized businesses. Statistical data shows that approximately 90% of New Zealand businesses have five or fewer employees with about two thirds of these businesses being run by owner-operators. Yet our “one size fits all” tax system design means we tax the corner dairy under the same rules as our largest corporate taxpayers. The one size fits all approach to taxation in New Zealand has given rise to complexity creep for smaller businesses. In the micro and small business context, rising complexity means rising costs. A recent example of this was the changes to our fringe benefit tax rules when the multi-rate method of taxing fringe benefits was introduced. So, much like wearing clothing that is two sizes too big, our tax system has become a bad fit for many of our businesses. While a certain level of compliances costs is inevitable, excess compliance costs undermine productivity. For an economy such as New Zealand’s that is seeking to foster a vibrant small business sector, it becomes even more important to keep compliance costs down. In terms of the overall compliance burden, taxation compliance costs are the largest single compliance cost businesses in New Zealand face, as the following pie chart shows. It is also well known that tax compliance costs fall disproportionately on small sized businesses. While larger businesses also face compliance costs- and are not to be overlooked- focusing on compliance cost reduction for small business is where the biggest gains to the New Zealand economy will be made in this context. This is highlighted in the graph below that illustrates this over a six-year period, by looking at tax compliance costs per full-time equivalent (FTE) employee. In the graph, the FTE group refers to the size of the entity measured by the number of employees. While New Zealand has put a strong focus on reducing tax compliance costs over the past 20 years6, tax compliance costs still feature as a major concern for business and Government. One of the limiting factors to simplification over the years has been the imposition of revenue neutrality. That is, successive Governments have been happy to simplify the tax system, but not at the expense of revenue. This constraint has often meant that tax simplification has taken a back seat to design features thought necessary to protect the tax base against potential revenue losses, whether hypothetical or real. The strong message is that the one size fits all model of axing New Zealand’s businesses is no longer sustainable–hence our desire to simplify tax compliance for small business. CHAPTER THREE Methodology Introduction This chapter describes and explains the methodology deployed in this study and at the research methods reading which informed our choice of methods. This study is a practical project of field study type. Using the Johnson model the remainder of this chapter describes and explains the methods we undertook in the month period of the research. Methodology and design Research literature has typically categorized the study of human and social phenomena by reference to two broad camps – the quantitative (or traditional, positivist, empiricist) and the qualitative (also referred to as the constructivist, naturalistic, interpretive, post-positivist or post-modern). The quantitative paradigm is the more traditional approach to research and typically adopts a deductive approach. In contrast the qualitative approach relies upon an inductive logic. Theories develop through the study rather than being established at the outset and the methodology is also likely to emerge as part of the process of research rather than being predetermined. Studies into tax operating costs borrow from both traditions, though there is a far greater emphasis on quantitative techniques. The studies use a variety of specific research methodologies to research into aspects of compliance costs. These include surveys (invariably using questionnaires) conducted through commercial polling organisations (Allers, 1994), or by mail (Green, 1994), email (Bertolucci, 2002) and telephone (Yellow Pages, 1996, CPA Australia, 2003), other interview-based methodologies (Plamondon, 1993; 1997), diary and case study approaches (Wallschutzky and Gibson, 1993), and documentary analysis (Arthur Andersen & Co, 1985) and estimating/simulating techniques (Thompson, 1984). Often the studies employ a combination of these approaches (Collard, Green, Godwin and Maskell, 1998). Postal surveys feature prominently, with nearly two thirds of the studies using this methodology wholly or in part. Roughly one quarter of the studies used interviewing techniques, usually on a face-to-face basis and with a structured survey instrument or script built into the process. The labour intensive diary and case study approaches tend to be the least used methodology. There have been some recent developments in the use of estimation/simulation modeling techniques, with the UK revenue authority adopting the Standard Cost Model (SCM), previously used by governments in Denmark and the Netherlands, in order to identify and measure the tax regulatory burden on business. Working with KPMG, Her Majesty’s Revenue and Customs has built a model, utilising activity-based accounting, that “maps UK legislation to the activities that business actually has to do to be compliant” with the requirements of the tax system (KPMG, 2006, p. 4). The SCM – also known as the Dutch model – applies a base formula (Activity Cost = Price (tariff x time) x Quantity (population x frequency x rate)) to measure the burden of UK tax regulation. The resulting estimate of costs is only a partial measure of full compliance costs (for example, it does not seek to measure voluntary compliance costs and a host of other costs) but nonetheless may provide a further useful methodology for benchmarking purposes. Administrative costs have primarily tended to be identified through analysis of relevant documentary evidence. Surprisingly, there is very little evidence that researchers have considered other possible methodologies, such as structured or in depth interviews or case studies, in attempts to assess administrative costs. Data analysis We made the data analysis manageable by developing an analysis of the two distinct activities and we manage to avoid the two sets of activities becoming blurred in practice (J. Mason, 2002). Data collection and analysis were simultaneous and continuous processes (Bryman & Burgess, 1994b). There was a need to create clear links between theory and data collection and between data analysis and theory with us dealing with method and theory concurrently rather than sequentially, that is, data collection and analysis was an iterative process (Hartley, 2004). The danger which was inherent in this is that premature conclusions could be drawn, with us having been unduly influenced by unusual or interesting data (Eisenhardt, 1989). In order to guard against this, we employed techniques advised by Hartley (2004) that is, careful description of the data and development of categories in which to place behaviours, followed by examination to see how they fit or fail to fit these categories, being mindful that categories may need refining or events need to be interpreted differently. This study used analysis of within-case data coupled with searching for cross-case patterns (Eisenhardt, 1989). Within-case analysis requires us to discover unique patterns within each case before generalising patterns across cases. After the patterns emerge, cross-case analysis we undertook to search for similarities and differences. Data gathered from the interviews were analysed for themes and indexed into analytical categories, a technique common to qualitative research (J. Mason, 2002). These categories represent key substantive taxation in which the study was interested and we include, for example, reasons for taxation, types of taxation and type of information shared. Transcripts of all interviews were indexed in order to readily track and retrieve all mentions of any of the categories. This aspect of our study necessitates some interpretation by us, as participants are unlikely to use words with which the categories have been labelled. The three concurrent flows of activity our analysis as defined by Miles & Huberman (1994) are data reduction, data display and conclusion drawing/verification. A general sequence of our analysis includes: Affixing codes to a set of field notes drawn from observations or interviews Noting reflections or other remarks in the margins Sorting and sifting through these materials to identify similar phrases, relationships between variables, patterns, themes, distinct differences between subgroups, and common sequences Isolating these patterns and processes, commonalities and differences, and taking them out to the field in the next wave of data collection Gradually elaborating a small set of generalizations that cover the consistencies discerned in the database Confronting those generalizations with a formalized body of knowledge in the form of constructs or theories (Miles & Huberman, 1994, p. 9) Ethics and limitation Ethical issues permeate interview research. We there for ensure potential participants were informed why the research is being carried out and we hopes to achieve, and we assured confidentiality (King, 2004a; Morgan & Symon, 2004). we aware of the fact that privileged information may be given which could be damaging if made public (Hartley, 2004). Prior to the commencement of this study we sought ethics approval from the university. We fully inform the participants prior to the study about the potential risks and procedures involved. We obtain consent prior to participation in the interviews and online consent will also be obtained from respondents prior to commencing the questionnaire. The data collection at all stages of the research project will take place in participant’s own environment with the researcher linked via technological means, for example skype or other internet connection. Participants will be free to withdraw from the study at any time without consequence. Confidentiality will be maintained by not revealing participant identities in any published material arising from the study. Identities will be protected by the use of pseudonyms. Hard copies of survey data and paper copies of field notes will be stored in a locked filing facility on the researcher’s premises. Only we and research supervisors will have access to the raw data from the study. Communicating the results At the conclusion of the research project all participants will be given a brief summary of findings for the purposes of informing practice in the use of professional learning networks (PLNs). Risks to participants are minimal and can be considered equivalent to the risks involved in their everyday work activities. Timeline The proposed timeline for this study is shown in the following diagram. References Allers, M. (1994), Administrative and Compliance Costs of Taxation and Public Transfers in the Netherlands, Groningen: Wolters-Noordhoff. Ariff, M. Loh, A. and Talib, A. 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A Separate Personal Income Tax for Ontario: Background Studies, Ontario Economic Council. Toronto. Vaillancourt, F. (1989). The Administrative and Compliance Costs of the Personal Income Tax and Payroll Tax System in Canada. Canadian Tax Foundation.Toronto. Wallschutzky, I. and Gibson, B. (1993). Small Business Cost of Compliance Project: Final Report. Australian Taxation Office: Canberra. Woellner, R. Coleman, C. McKerchar, M. Walpole, M. and Zetler, J. (2001). Taxation or Vexation – Measuring the Psychological Costs of Tax Compliance. Prospect: Sydney. Appendices Read More