Chapter 2
We need more world-class businesses operating in New Zealand. Achieving that goal requires a greater dedication to creating an environment that attracts and retains such firms and incentivises their growth. There are, of course, many factors that contribute to creating such an environment. In this chapter, we deal with just a few of them.
Reducing the Cost of Complying with Government Regulations
SBAG accepts the need for regulations and standards that facilitate the business environment.
The government recognises that compliance with regulations can be a significant constraint for business and economic growth. Thus, in 2006/07, the Minister of Commerce and Small Business ran the Quality Regulation Review. That led to some regulatory changes and the promise of more.
However, the compliance costs for small businesses continue to be four times the cost per employee that applies in large businesses.7 In recognition of the limited time and administrative help SME owners have, the government should be doing more to assist small businesses that are attempting to navigate the government's regulatory maze or to identify and achieve the standards that are required of their products or services. One method, that is popular overseas, is exempting SMEs from regulations or providing a lesser level of compliance for them.
Our predecessors made several worthwhile recommendations for action in this area.
Reducing Compliance Costs in Local Government
We want to see improvements in the local authority resource consent and building consent processes.
We consider that there should be some category or classification for minor building works where there is an obligation on people only to notify the local authority that the work has been done and has met clearly prescribed standards, with penalties if they don't. This would remove the requirement to get consents in advance if the works are minor and carry minimal risks.
Under such a regime, people would also have the option of using qualified workers, or not, for carrying out the works, depending on the standards required.
This proposal would free up time and resources, and reduce frustrations and compliance costs. It would reduce the number of consent applications currently clogging up the consents process, thus giving officials more time to move significant applications more quickly through the process.
Schedule 1 for Exempt Building Works in the Building Act 2004 made some moves in the direction described above. However, the list of building works exempted in Schedule 1 needs to be significantly expanded.
Bold moves will be needed also if the current increasing tide of micro-oversight of business activities by local government officials is to be turned back.
To encourage action in this area, councils should be monitored on how well they implement regulations. SBAG therefore supports Business New Zealand's recommendations on local government performance, set out in Local Government: The Business Case, that:
- timelines be set for all territorial government permit and licensing activities and that the permit/licence is granted free should the timelines be breached
- more comparative information be published annually by the Department of Internal Affairs comparing performance across comparable activities, processes and financial management between territorial authorities.
SBAG recommends:
That local government consents processes be simplified by removing the need for minor building works to get a prior resource management or building consent.
Employing New Staff
Employing staff is a significant responsibility. Small businesses, like all businesses, need to be professional in the way they recruit, but it appears that some employers are failing to put in place the most fundamental aspect of the start of an employment relationship – an employment agreement.
We support the Department of Labour's efforts to ensure tailored information and better training is available for small business managers around recruitment practices. The Employment Agreement Builder is an example of a useful, easy-to-use, practical and free tool available to all employers.
We believe more SMEs would use the employment relationship material available via the business.govt.nz portal, and the Employment Agreement Builder in particular, if the Department of Labour obtained endorsement by employer organisations for the materials and then more actively and extensively promoted them (with the endorsement attached).
The way SMEs operate is often starkly different to larger enterprises. Nowhere is this more evident than in the working environment. In a SME, employers and employees usually work side by side. Each employee is likely to be crucial to the business. Often, no person in the business, other than the owner, has the skills to do the work if one person is not performing. That is why, for SMEs in particular, selecting and managing employees is a major undertaking.
We are concerned that the decision to take on employees – an essential step for business growth – is too often not taken by young businesses, or is not done well. The common misconception is that dealing with employees is too hard these days. In particular, many small business employers and employees do not know how to deal effectively with employment disputes. They rely on hearsay or misunderstandings (and, in some cases, misinformation) about what has happened in other cases (for example, that it is inevitable that significant compensation must be paid to employees who perform poorly and then raise personal grievances). These misconceptions then drive their behaviours.
The first SBAG, in its initial report, recommended grievance-free probationary periods for all businesses and, in its second report, restated the recommendation with a 12-month qualifying period, again for all businesses. It later advocated an alternative dispute procedure for businesses of all sizes. The government has not taken up any of those recommendations.
We believe the need for this problem to be addressed, particularly in the SME context, continues to be a pressing one. The impact of one poorly performing employee in a SME and the time it takes to go through the present disciplinary process can be devastating to the business. Therefore, it is not surprising that it remains a key topic in many of our conversations with SMEs.
We consider it very important, despite our awareness of the government's views, that we reiterate SBAG support for grievance-free probationary periods. However, we would take a more targeted approach than our predecessors and believe that, whilst preserving human rights protections for all employees, a provision for a grievance-free probationary period of 12 months should apply to any businesses with 15 or fewer full-time employees.8
Recognising that our preferred solution would not be supported by the government, we focussed instead on other ways to break the cycle of misconception and destructive behaviours during employment disputes. Our recommendation involves making it easier for both employers and employees to get access to balanced and helpful advice relevant to their particular dispute. We recommend that free access be given to knowledgeable people skilled in advising parties in employment disputes. These advisors do not need to be government officials. The government could, for example, provide free access to advisors employed in private sector employer and employee organisations.
SBAG recommends:
That information on good practice in employment relationships tailored to small business owners and managers, preferably endorsed by employer organisations, be made more readily available and be better promoted. This should include easier access to educational material and to support mechanisms (for example, free access to knowledgeable people who can provide practical and balanced advice to employers or employees on handling employment disputes).
Employment Dispute Resolution Processes
Despite best intentions and good faith, some employment relationships just don't work out.
The current legislated system for ending employment relationships is focused on maintaining the employment relationship and, because it is largely process driven, can result in expensive disputes if the employer does not get the process right. It can also result in an order for the reinstatement of workers, which is likely to be unworkable in a small business environment.
We are pleased that the Minister of Labour understands the need for increased educational resources and support around the issue of dispute resolution. An effective employment dispute resolution system is one that is able to quickly and fairly resolve or end broken employment relationships, in order to minimise the distress for both parties involved. The improvements that should be made to the present system include:
- allowing more weight to be given to the substance over the way in which a dispute was dealt with by the employer (i.e. the procedural mechanism used)
- requiring, in relation to available remedies, greater emphasis to be placed on the employee's contributing behaviour.
We welcome the recent announcement by the Minister of Labour that these issues are to be assessed and hope that the assessment, which is due for completion in July 2008, will lead to the changes we seek. We believe such changes would increase the credibility of the current processes amongst employers and also reduce the incidence of frivolous and vexatious claims (many of which are settled before reaching the formal mediation process).
This, too, is an issue that is recognised in other jurisdictions. For example the new Australian government has pledged to develop a simple fair dismissal code to protect small businesses and to remove the right of authorities to make orders to reinstate sacked workers where that is not in the interests of the business.
SBAG recommends:
That, in relation to personal grievances, decision-makers be required to place greater emphasis on the substance of a dispute over the process developed by the Employment Court, and on the contributing behaviour of the employee as provided for in s124 of the Employment Relations Act.
Skills Training
Research by the Industry Training Federation suggests that employers appear to be taking on greater responsibilities for staff development – despite the lingering concern that their employees can more easily move on to (or appear more attractive to) another employer once the training is completed.
To recognise those good employers who are making the investment in upskilling their employees, and to encourage more employers to make the effort, we believe that employers should be compensated (either tax credit or grant) for the costs of the support they provide their employees and the loss in worktime/productivity they incur while the employees are at formal training.
To keep the system simple, the compensation could be a flat rate per year per employee in formal training.
SBAG recommends:
That employers be compensated (either tax credit or grant) for the costs of every employee they have in formal training.
Work-Life Balance
Like the government, SBAG believes there is a growing need to address issues of work-life balance.
However, while most of the public debate tends to be about employee work-life balance, we think equal regard needs to be had for the work-life balance needs of small business owners.
Many SMEs are family affairs. Both partners are actively involved in the day-to-day running and
hands-on management of the business. New Zealand research suggests that balancing work and life commitments is a major issue for many of these small business owners.9 As employees' rights to annual and other leave have increased, many SME owners and their families have picked up the extra workload themselves. In some cases this has been a financial necessity. In other cases the shortage of skilled workers means it is difficult to recruit temporary staff or require existing staff to work even longer hours. In the past, extended families often helped out with domestic responsibilities, but the greater geographic dispersion of family units, and increased participation by women and older workers in the formal workforce, has reduced access to this support.
There are many ways in which the government could assist SME owners to regain balance and maintain their productivity. Our recommendation is to raise the level of tax deductibility for childcare and housekeeping expenses.
The present level of tax deductibility is significantly out of step with current costs.10 Only $310.00 per annum of either housekeeping or childcare expenses is deductible.
A more appropriate level of tax deductibility would be up to 50 per cent of the actual costs of childcare and housekeeping incurred by the business owner or an employee. That percentage is similar to the level of deductibility for entertainment costs.11
Improving the affordability of childcare services through tax deductibility would increase access to a wider range of childcare choices. This would particularly benefit SME owners and those workers who work outside the normal business day12 or in rural locations where currently the provision of formal childcare facilities and after-school services is limited.
Increasing the level of deductibility for childcare/housekeeping also increases the choices of potential employees. It may encourage those primarily responsible for childcare and housework (predominantly women) to return to the workforce by making it more worthwhile to do so. Older workers and those with dependent relatives may also be encouraged to remain in the formal workforce if their responsibilities at home are eased by more affordable household help.
There are a number of positive potential spin-offs from adopting this policy. These include increasing
the productivity of business owners and workers by reducing their domestic workload, and increasing
the proportion of the household/childcare services sector that would be subject to taxation.
We would like to stress that our recommendation is not a change in policy. It is simply a review of the appropriateness of the levels of expenditure that are deductible currently.
SBAG recommends:
That the expense limits for tax deductions for childcare and housekeeping be increased to 50 per cent of the actual costs as a means to encourage people into the workforce and to give SME owners a greater opportunity to balance work and family pressures.
Enhancing the Tax Regime
We note the publication of the government's discussion paper on ways to reduce the compliance burdens for SMEs of the current tax regimes. We hope it will lead to actual and worthwhile changes.
However, we would urge the government to continue to keep business taxes and business tax compliance costs constantly under review. Any perception that the tax rates are too high and compliance too complex has a significant impact on business investment decisions and, therefore, on innovation, enterprise and economic growth.
In that regard, we support the proposals of the first SBAG: that government consider a cash accounting-based tax regime for small businesses below $5 million turnover and the lifting of various tax thresholds for small businesses.
We also have a particular concern with fringe benefit tax (FBT). FBT is a complex tax for SMEs and is an administratively expensive way for government to collect a relatively small amount of its income.13
FBT was introduced at a time when there were high differentials between personal and corporate tax rates, and employers were creating ways in which to increase the in-hand value of employee rewards whilst reducing overall company taxation.
The incentives for such behaviour have, we believe, disappeared with the subsequent changes to personal and corporate tax rates. Thus, the government should consider removing FBT altogether.
Alternatively, it should take steps to significantly simplify FBT compliance, for example, by increasing the thresholds to take small businesses out of its ambit and using flat rates for asset items like cars (possibly with discounts for environmentally-friendly business vehicles) to remove the need for producing those well-known works of fiction titled "logbooks".
SBAG recommends:
That fringe benefit tax (FBT) be abolished
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