The proposal is Andrew Little's first policy since becoming leader after the 2014 election, and was aimed at giving small businesses more control over when they paid their tax.
He launched a discussion document on the policy at a speech to the Hutt Valley Chamber of Commerce this morning.
"This proposal gives business owners the option to pay up to 100 percent of their tax through regular withholding payments, at the rate they set themselves," Mr Little said.
"Alongside this, I'm also announcing that we would be scrapping late penalties for provisional tax and increasing the threshold for when provisional tax applies, from $2500 to $5000."
At present, provisional tax rules require a business to estimate, in advance, its taxable profits for the year and pay tax in three large instalments over the year.
"If they guess wrong, they can be faced with a big bill at the end of the year which can push a small business to the wall," Mr Little said.
"Under Labour's proposal, businesses will have the option of choosing to pay their tax through regular instalments at a rate they can adjust. This means businesses can align their payments to suit their circumstances.
"Flexible Tax for Business is about giving our businesses more control over how they pay tax. That's how we will help them do well, grow and create jobs."
Mr Little said the tax change would "take the handbrake off" many small businesses and remove the fear factor for companies which had seasonable or variable tax bills.
It implemented, it would not be a compulsory measure and businesses could choose to stick with the current system.
Labour would be seeking feedback from businesses before finalising the policy ahead of the 2017 election.
Mr Little spoke about the "worrying" domestic and international threats to New Zealand's economy, from plummeting dairy prices to uncertainty in China and the Eurozone.
The Government needed new approaches to respond to these challenges, he said, and one of the best ways to do this was to back small businesses - which employed 38% of the workforce - to "become the engine of job growth in New Zealand".
A tax consultation paper released by Government in March this year raised changes to provisional tax, and New Zealand First proposed changes to the system earlier this week.
Mr Little said Labour's policy contained more detail and had progressed further than Government or New Zealand First's proposals.
The policy's fiscal cost was expected to be $15 million, due to the reduction in penalty payments and lifting the threshold for provisional tax.
Cut and paste job, says Joyce
Economic Development Minister Steven Joyce today described the Labour policy as a "cut and paste" of a previous Government announcement.
"[Labour] it seems to have overlooked that the Government launched its own discussion document containing almost identical proposals back in March," he said. "These in turn were based on National Party policy at the last election."
Feedback on the consultation paper had been generally supportive, Mr Joyce said, and provisional tax changes were referred to by submitters more than any other proposal.
"As we've said previously, the changes will require new technology to be implemented, which will be developed as part of the IRD's Business Transformation project."
The minister joked that he would accept a late submission from Labour, and he appreciated the party's "implied endorsement" of the IRD changes.
But Mr Little said he had been advised that the tax changes could be made before the IRD upgrade took place.
"Our advice from Robin Oliver, the deputy commissioner of Inland Revenue, is that they could do all this within their existing computer system."
Act Party supportive
Labour's policy did receive some positive support this morning, with Act leader David Seymour agreeing with Labour's criticism of the "archaic" tax rules, though he felt that provisional tax should be ditched altogether.
"Small business people have long complained that paying tax based on the previous year's earnings, rather than this year's can create a cashflow nightmare," he said.
"Provisional tax is out of date and unnecessary in the age of digital financial transfers. The IRD needs to recognise its impact on the cashflows of small businesses."
PwC tax and private business leader Geof Nightingale said Labour's policy was "worth considering".
"While tax pools have assisted businesses manage provisional tax for a decade now, this idea would provide another sensible option to take the sting out of getting provisional tax wrong," he said.
- By Isaac Davison of the New Zealand Herald
