New taxes for small businesses are being welcomed across the board today, with both New Zealand First and Act leaders complimenting the government.

Prime Minister John Key announced the changes in his Pre-Budget Speech to a Business New Zealand event in Wellington.

John Key has announced changes to taxes in NZ.

The main change is removing the provisional tax regime for small and medium sized businesses and replacing it with a pay as you go system.

The package will make paying tax easier and more certain, reduce the burden of interest and penalties, and help smaller businesses tailor payments to their own circumstances.

Provisional tax currently works by businesses guessing the likely tax bill for any year and paying that amount off in three instalments.

'Among other things, businesses tell us that provisional tax is hard to get right and expensive to get wrong,” says John Key. 'Perfect accuracy can sometimes be costly in a way that doesn't seem justified. And some penalties are seen as punitive and discourage compliance.”

The new option instead works out a small businesses tax payment on an ongoing basis throughout the year. And every two months a business' accounting software will calculate the taxable income for that period.

Act leader David Seymour says it's a significant step forward for New Zealand's tax policy.

'This will be a long-awaited relief for many self-employed and business-owning Kiwis. The efficiencies of digital payments and accounting mean that a pay-as-you-go system has been overdue for some time. Our laws need stay in line with technological advances,” says David.

New Zealand First announced the policy nine months ago, says party leader and Northland MP Winston Peters.

He's pleased the Prime Minister has decided on reform of provisional tax paid by small and medium businesses.

'Mr Key's announcement today may be a diversion from the present stress around the Panama Papers but the Prime Minister will face more questions on this.”

Small Business Minister Craig Foss says changing the provisional tax system is yet another way the Government is helping small businesses grow and thrive.

'The tax system is a key issue for New Zealand's small businesses — it's consistently raised with me by business owners, local chambers and business associations up and down the country.

'The changes announced today show the Government is focused on helping small businesses get ahead by saving them even more time and money.”

Finance Minister Bill English and Revenue Minister Michael Woodhouse say the package will make paying tax easier and more certain, reduce the burden of interest and penalties, and help small businesses tailor payments to their circumstances.

Key measures in the proposal are:

• Provisional tax is being reformed, with a new pay-as-you-go option giving up to 110,000 small businesses a way to pay tax as they earn income from 1 April 2018.
• Use-of-money interest will be eliminated or reduced for the vast majority of taxpayers.
• Contractors will be able to choose a withholding tax rate that suits their needs, rather than one being set for them.
• The ongoing 1 per cent monthly penalty will be scrapped from 1 April 2017 for new debt – although immediate penalties and interest charges for late payments will continue to apply.

The changes are part of a wider business transformation programme which will support the use of new technology to make it easier to deal with Inland Revenue, says Michael Woodhouse.

'Around 30 to 40 per cent of businesses currently use cloud-based accounting software. This is expected to grow to 85 to 90 per cent in the next 10 years,” says Michael.

'This package allows small businesses to pay provisional tax through their accounting software, rather than having a separate process for their taxes.

'Small businesses are the backbone of the New Zealand economy. We want to help them spend more time focused on their business, not their taxes.”