Anyone going into business needs to be aware of what taxes they need to pay and when they need to pay them. There are two types of taxes – the ones you must pay, and the ones you may have to pay depending on what you do in your business.
Business Income Tax
Every business must pay tax on its net profit. This is the profit the business has earned once expenses have been subtracted from all revenue. You need to be careful though, as not everything you spend money on in your business will be counted as an ‘expense’.
Some examples of business expenses include:
- Vehicle expenses, transport costs, and travel
- Rent paid on business premises
- Depreciation on assets
- Interest on borrowing money for the business
- Some insurance premiums
- Work uniforms
- Cleaning costs
- Software subscriptions (e.g. accounting software)
- Repairs and maintenance on business equipment
- Home office expenses
- Work-related mobile phones and phone bills
The IRD has strict rules about what does, and does not, count as a business expense. Areas to be particularly careful about are food and drink, entertainment, purchase of assets, staff gifts, and reimbursement of mileage. Sometimes only a portion of these costs are expenses, and sometimes they are not considered expenses at all. Getting advice from an accountant is a good idea.
To claim an expense, you must have a proper record of that expense. In most cases this means having an invoice.
Fixed assets (items costing over $500 which have a useful life of more than a year) are not expenses. Instead, a percentage of the cost (depreciation) is counted as an expense each year.
The rate of tax you pay will depend on your business structure – a company pays tax at a set rate of 28%, whereas sole traders and partnerships pay tax at the relevant personal tax rates. You can find out more about this on the business income tax section of the IRD website.
Factor to Consider
Note that most businesses do not pay their tax in one lump sum at the end of the tax year. Instead, they pay provisional tax in instalments during the year based on estimated profits or actual profits made so far during the year. Although businesses do not have to pay provisional tax payments in their first year, this does not mean the first year in business is tax-free!
In New Zealand, workplace injuries are covered by ACC. This is a type of compulsory insurance – you pay an annual levy to the Accident Compensation Corporation (ACC), and in return they provide cover for any workplace injuries. Even if you are self-employed and have no staff, you will need to pay ACC levies to cover yourself. The amount you pay depends on the industry you work in, how much you pay your staff, and your business’s history of work-related injuries.
For more information, consult the ACC website
Goods and Services Tax (GST) is a tax that you collect for the government. You add GST onto the prices you charge customers, and then you pay Inland Revenue the difference between the GST you receive from customers and the GST you’ve paid on all purchases. If you do not register for GST, you cannot charge customers GST and you cannot claim back the GST your business pays on its purchases.
You are only required to register for GST if your business will have a turnover of more than $60,000 in the upcoming 12-month period (or you have exceeded the $60,000 threshold in the previous 12-month period). Note that ‘turnover’ is sales revenue, not profit! If your turnover is less than $60,000 you are not required to register, but can choose to do so if you want.
It is very important to remember that the GST you collect from customers is not your money and should never be treated as such.
PAYE stands for ‘Pay as you Earn’ and applies if you employ staff or if you are paying yourself a salary or wage from your business. Before paying any employees, you are required to deduct the correct amount of PAYE from their salary and wages. This is to cover their income tax and personal ‘earner’ ACC levies. You then need to pay this money to Inland Revenue and ‘file a return’ so Inland Revenue knows how much each employee earned, and what deductions you made.
Using payroll software will help ensure you deduct and pay the right amount of PAYE, as well as keep track of all holiday and leave owing to staff. It can also make the process of filing returns much easier.
Fringe Benefit Tax (FBT)
If you or your employees are receiving ‘perks’ these benefits may be liable for they might be liable for FBT. Common examples of fringe benefits include using a business vehicle for personal use and giving staff discounts on goods and services. Find out more about FBT here.
You will be responsible for deducting any employees’ KiwiSaver contributions from their wages or salary, as well as making employer contributions to your employees’ KiwiSaver funds. These amounts must be paid to Inland Revenue. Find out about your obligations here.
Keeping Business Records
Keeping accurate, up-to-date records of business income and expenditure is essential. You must keep:
- Bank records as it proves what money actually came in (sales) and went out (expenses)
- Invoices you’ve sent to clients for sales or received as expenses. There are minimum requirements as to what information is on these invoices.
- Invoices you’ve received for purchases
- Cashbook, petty cashbook and wage book records
- Records of dividend payments
- Records of interest paid during the year
- Records of fixed assets
- Records of all liabilities (debts)
- Returns filed with Inland Revenue
For more information, refer to the Inland Revenue record keeping checklist.
It is best to use accounting software to help you maintain your business records. There are low-cost options available, and the benefits offered typically far outweigh the cost. Some accounting packages can be used to file your GST, provisional tax, and PAYE returns for you.