New Zealand is a country of small and medium sized businesses (“SMEs”). Ministry of Business, Innovation and Employment statistics indicate that SMEs with up to 20 employees account for 97% of all NZ businesses, employ 30% of all employees, and contribute 27.8% of New Zealand’s GDP . A vibrant and high performing SME sector is therefore critical to the prosperity of New Zealand.
So what does Budget 2014 have in store for this vital sector? Head of KPMG’s Private Enterprise Team, Paul McPadden, explains the impacts on SMEs.
Extending apprenticeship subsidies and employment grants
Budget 2014 contains $20m for an additional 6,000 trade apprenticeships under the Government’s Apprenticeship Reboot subsidy programme, introduced last year. That programme provides subsidies of $1,000 to $2,000 per trainee, with employers eligible for an equal payment.
This measure should be welcomed by SMEs, particularly those supporting the Christchurch rebuild and housing construction sectors (as these are priority trades for the Government’s apprenticeship programme). However, there will be a lag between the right skills coming online from apprenticeships, and the immediate need for businesses struggling to find qualified trade employees.
Similarly, supporting the innovation focus, Government has provided a further $199 million for lifting tuition subsidies in science, agriculture, ICT, and two health sciences (pharmacy and physiotherapy). There is also additional funding for more Centres of Research Excellence. Increasing skills over time is essential to foster the growth in capability of New Zealand businesses, and particularly SMEs.
Another Budget 2014 initiative is a $3,000 (tax-free) grant to encourage job seekers to take up work in Christchurch, which may assist Canterbury businesses in the interim. With a much lower unemployment rate than the rest of New Zealand, the Government is looking to match demand in Christchurch with supply. However, again, the issue for Canterbury SMEs will be getting the right skills to fill vacancies.
The same old tax regime for SMEs
Last year’s Budget contained some tax sweeteners for SMEs undertaking R&D, with a proposal allowing their initial R&D tax losses to be cashed-up. Businesses and employees were also given a “tax cut” through a reduction in ACC levies, with the promise of more reductions to come.
Budget 2014 signals further reductions in ACC levies, and this is welcome. The Government has budgeted for around $480 million in 2015/16, with the actual amounts to be confirmed after public consultation by ACC. The Budget also confirms the R&D tax proposals in last year’s Budget will proceed. The Government expects this will return nearly $60 million to businesses over the next four years.
There are no game-changers for SMEs from a tax perspective, however. Disappointingly, tax simplification for small business seems to have dropped off the Government’s agenda.
SMEs generally have to follow the same tax rules, with their inherent complexities, as large businesses. For example, New Zealand’s financial arrangements tax rules must be applied if a New Zealand business has foreign sales, which are hedged to the NZD (not uncommon given the volatility of our dollar).The financial arrangements rules require complex calculations to work out the gain/loss on the hedge.
Other countries allow their SMEs to operate under simplified tax principles and rules, reflecting the additional time and costs of requiring a higher degree of accuracy. This needs to be considered in New Zealand, given the disproportionate compliance costs faced by SMEs.
Some countries also have different tax rates for small business, and offer a variety of tax concessions, to reflect the unique contribution of SMEs to their economies. New Zealand has largely eschewed this approach in favour of treating all businesses the same, under a “broad based low rate” approach to tax policy. It may be timely to review this where SMEs are concerned.