Government's changes to small business tax welcome, but a long time in the making: John Milford

OPINION: When the Government last week announced its "SME-friendly tax package", with the promise it would reduce compliance costs and make tax simpler, you could almost hear the cry go up from small businesses up and down the country: "and about time too!"

With good reason. I doubt you could find even one of our 459,000 small-medium enterprises (those with 20 employees or less) who wouldn't tell you tax is their number one compliance cost. That's why the response was overwhelmingly positive.

To re-cap: the Government's tax simplification and modernisation project is designed to see what changes are needed to meet the challenges of the 21st century. The call for submissions (due by May 30) centres around proposals to reform provisional tax with a new pay-as-you-go option for business with a turnover of less than $5 million, eliminate or reduce use-of-money interest for most taxpayers, enable contractors to choose a withholding tax rate that suits their needs, and scrap the ongoing 1 per cent monthly penalty for new debt.

These are issues that have irked, or worse, business owners for years. Of course it'll be argued that some of the proposals on their own will make little difference, and that's probably true. But I would expect that when taken together they will lead to overall compliance cost reductions both within individual businesses and over the whole of the business community.

I'm particularly keen to see numbers around how much cash flow these changes could free up for businesses to reinvest, because that would be telling. I suspect we'll be surprised. But though that would be a big plus, even more important would be the savings in time, because that's the critical factor for SMEs.

For example, if some of the changes were to free up, say, two hours a month around tax compliance alone then that would give SMEs three working days extra a year to build their business. Add other compliance savings into that and all of a sudden there's a week of saved time – time that could be used for planning, innovation, or even just standing back and seeing the wood for the trees.

And let's not forget the unseen benefit of what an economist colleague of mine calls "the psychic costs of compliance", where a SME owner is not able to get to sleep because he or she is worried they've made a wrong calculation on tax. As he says, the more that things are 'certain' in the mind of the SME owner, the better.

These proposals are a promising start which has potential to make doing business easier and fairer, and I trust businesses will take some of their precious time to share their thoughts on what matters to them, because it will be likely the last opportunity for a long time.

Then it'll be up to Inland Revenue to deliver, and there are challenges ahead for them. There are many moving parts in this process, so while it's great that they could possibly save business money in one area, all that hard work could be undone if they don't deliver in another part of the changes or require compliance in another area that doesn't need it. They are about to have something of a balancing act on their hands and they need to get it right.

Business is ready to participate to ensure the changes are a step in the right direction and can be enacted so everyone wins. Overall, once the dust has settled I would expect this project to provide a meaningful drop in compliance costs.

As Finance Minister Bill English put it: "We want the tax system to fit in with how businesses operate, not the other way around." We will hold him to that.