Tax made simple

Nothing is certain except death and taxes. That’s why you need to understand your tax obligations. Staying on top of them will make running your business easier - and help you to avoid an unexpected bill down the track.

This article provides an overview of the main taxes and levies you need to think about. It also provides some tips to help make managing your tax easier, however, it doesn’t offer tax advice. It’s important to get your own, independent, advice from your accountant or tax specialist.

If you’re a sole trader, you can use your personal IRD number. Companies or partnerships need their own IRD number. 

Here’s an overview of the different taxes and levies that might apply to your business. The amount you need to pay depends on your particular business. It can seem daunting, but you’ll find plenty of information and help on the Inland Revenue website. Your accountant is also a key source of information.

Every business, including yours, must pay income tax on its net taxable income each year.

Net taxable income is the amount your business earns from selling goods and services, minus what you spend in business expenses. For example if you earn $100,000 in income from selling your products or services, and incur $30,000 of expenses (such as rent, supplies, etc.), your net taxable income is $70,000. This is the amount you pay income tax on.

Traditionally, New Zealand businesses have paid tax in instalments several times a year – this is known as Provisional Tax. In April 2018 IRD introduced a ‘Pay-as-you-earn’ option for small businesses, sole traders and contractors called the Accounting Income Method (AIM). The section below describes the Provisional Tax method. For more on the new AIM method check out our overview or visit the IRD website.

The way you pay your income tax under the Provisional Tax method is different for your first year in business than for subsequent years.

The first year

At the end of your first financial year, usually 31 March, you (or your accountant or bookkeeper) work out your net taxable income, and calculate the tax you pay on that. If you want to spread the load a bit rather than pay your whole tax bill at the end of the year, you can choose to make voluntary payments throughout your first year.

After the first year

After your first year, you’ll need to pay Provisional Tax.

Apart from the AIM process noted above, there are 3 other provisional tax payment methods:

1. Standard Option
2. Estimation Option
3. Ratio Option 
   
   

Here’s how it works:

Under both the Standard and the Estimation Options you will pay provisional tax in three instalments during the year – usually 28th August, 15th January and 7th May (for a March year-end)

Standard Option

When you have filed your income tax return for a year, your next year’s provisional tax amounts are based on the tax payable as per the previous year’s income tax return plus a percentage increase.

If you have filed the previous year’s return before the due date for your first provisional tax instalment for the next year, the increase is 5%, otherwise the increase is 10% of the preceding year’s filed income tax return.

Estimation Option

You estimate what your income will be for the coming year, and work out the tax payable on your estimate.

At the end of the year you work out your actual income. If you earned more than your provisional taxable amount, you may need to make an extra payment known as ‘Terminal Tax’. If you earned less than your provisional taxable amount and you’ve paid too much tax, you can get a refund or a credit towards next year’s payments.

The IRD will charge you interest on underpayments of provisional taxes if your final liability is more than your provisional taxable amount. If you use the Standard Option the interest applies from the third instalment date, if you use the estimation option any interest will be charged from the first instalment date.

Ratio Option

If you are GST registered, you calculate your provisional tax by applying a ratio percentage to the taxable supplies in your GST returns so your provisional tax instalments align with your business cashflow. 

Note - you only have to pay Provisional Tax if your tax bill for the previous year is $2,500 or more.

You must pay an annual levy to ACC to cover workplace injuries to any employees and yourself. Even if you are self-employed and have no staff, you need to pay self-employed ACC levies. Think of it like an insurance payment, covering you if you suffer an accident and can’t work in your business.

The amount you’ll need to pay depends on:

• The type of industry you work in — some industries carry a higher risk of workplace injuries.
  
• How much you earn.
• How much you pay your staff (if you have staff). 
  

You can find out more about ACC levies on the Business section of the ACC website.

If you think you’ll earn $60,000 or more in sales income/ turnover in the upcoming 12 months, or if you’ve sold $60,000 or more over the last 12 months, you’ll need to register for GST. If your turnover is under $60,000 you still might want to register for GST, as you can claim a GST refund if you have large set up costs. You can register for GST online at the IRD website.

Once you’re registered, you must add GST (currently 15%) to the cost of the goods and services you sell, and file a GST return regularly (usually every two months, or for smaller businesses every six months). Simply add up all the GST on your sales, take away the GST you’ve paid on your business expenses, and either pay the difference to IRD or claim a refund from them. 

You can file GST returns electronically – some accounting software packages can generate them for you automatically.

For more information about your GST obligations, check the IRD website.

If you employ staff or pay yourself a salary, PAYE tax applies. You’ll need to deduct PAYE from wages and salaries and pay it to Inland Revenue every month. There’s also new payday reporting requirements coming soon – check out some details here.

You’ll need to file returns each month and you MUST keep accurate payroll records for Inland Revenue. Consider using Payroll software to help with this, as it will make it much easier to keep track of what to pay and when, holidays, sick days and so on. There are a number of payroll systems available which can automate many parts of the process and help make payroll management easier. If you’re wondering whether these could work for you, you may want to check out Smartly's special 6 month free trial for ANZ customers—.

You can find useful information on your PAYE obligations on the Inland Revenue and Business.govt.nz websites.

If you’re paying employer contributions to your employees’ superannuation scheme (e.g. KiwiSaver), you’ll need to pay Employer Superannuation Contribution Tax on those contributions. Find out more at the Inland Revenue and Business.govt.nz websites.

If you provide benefits or perks to employees as part of their employment, you’ll need to pay Fringe Benefit Tax. Benefits can include things like:

• Private use of a motor vehicle.
  
• Parking.
• Discounts on your goods or services.
• Insurance and superannuation schemes.
• Gifts and prizes.
  

Check the Inland Revenue website for more detail on Fringe Benefit Tax. 

Inland Revenue can help you meet your legal obligations. They offer a free tax information service to new businesses; help with tax compliance, and free tax seminars and workshops.  Also, their website features useful tax articles, frequently asked questions and various tax documents and forms.

It’s important to file your tax returns and pay your tax on time, as there may be penalties if you don’t. Your accountant can help you sort out the calendar of dates involving Provisional and terminal tax, GST and other tax obligations.  You can also use IRD’s tax due date calendar.

You must keep business records for at least seven years, and they need to be accurate and up-to-date. Keep:

• Bank records — they show your sales and expenses.
  
• Invoices for sales, purchases and expenses.
• Your cashbook, petty cashbook and wages book.

Avoid being hit with an unexpected tax bill by estimating what you’ll need to pay and putting money aside (e.g. in a savings account such as an ANZ Business Premium Call Account). Similarly, when you receive payment for goods and services, deduct the GST and put it aside to ensure you always have enough to pay your GST returns.

You can offset your legitimate business expenses against your taxable income - for example, if you operate a business from home you may be able to claim some of your home costs as business expenses. But it’s important to know what you can claim and what you can’t – for example, you may also not be able to claim 100% of the cost of entertainment. Your accountant can provide more information, or see the section on Claiming Business Expenses on the Inland Revenue website.

If you make a mistake calculating your tax or don't think you can pay a tax bill, contact your accountant or Inland Revenue as soon as possible to discuss a plan to fix things. Don’t put it off - the earlier you let them know, the easier you’ll sort things out.

Using a chartered accountant as your tax agent (submitting tax returns on your behalf) and as a tax adviser can save you a lot of time, effort, and stress. They deal with tax issues every day and are up to date with all the latest tax rulings and changes, this means you can focus on your business. An accountant can also:

• Help you set up a good record keeping system and a calendar of tax returns to streamline your tax compliance.
  
• Send you reminders of due dates for tax returns, helping you avoid late payment penalties.
• Prepare your end of year tax returns for you.
• Help you to claim all the expenses you're entitled to.
• Advise you about tax matters such as leasing versus buying equipment, or whether to use a private vehicle or company car.
  

Of course, you’ll need to pay for your accountant’s services – but it could be money very well spent.