Tax Facts & Dates

When it comes to meeting your tax requirements, ignorance is not a recommended approach. A better plan is to concentrate on your core business and delegate the financials to people who deal with figures, day in and day out. Like the team at Switch Accounting.

Below are the most common questions we are asked by small business owners:

What does the IRD require from me?

There are four key requirements, depending on the size and nature of your business:

1) IRD number

If you operate as a partnership, company or trust, you will need to apply for a separate IRD number. If you are operating as a sole trader, your personal IRD number will also be your business IRD number.

2) Goods and Services Tax (GST) application

If your turnover (sales) is more than $60,000 – or you think it will be more $60,000 in any 12-month period – you must register for GST. If your turnover will not be more than $60,000 within a 12-month period, you don’t have to be GST registered, but you can voluntarily register. Talk to us at Switch Accounting about whether voluntary registration will benefit you.

3) Employer registration

If you intend to employ staff, then you need to register as an employer and will have to make PAYE, withholding tax, student loan, child support and Kiwi Saver deductions from your employees wages. You will then need to file PAYE returns monthly and send the deductions to the IRD. Don’t panic. Switch Accounting offers a full payroll and PAYE service.

4) Fringe Benefit Tax (FBT) registration

FBT is payable on most benefits given to your employees or shareholder employees, including yourself. The most common reasons why FBT crops up are when an employer provides:

  • A motor vehicle to staff or a shareholder employee, where the vehicle is available for private use (and, yes, private use generally includes travel between home and work);
  • Subsidised or free goods and services to staff; or
  • Low interest loans to staff.

There are other benefits that require FBT to be paid and different methods and rates for calculating FBT. Ask Switch Accounting about FBT in your business.

What business structure should I choose?

It depends on several factors, including the size and set up of your business. Essentially, there are four basic choices:

1) Sole trader: You are in business on your own, with no formal structure

The advantage of being a sole trader is simplicity – and the fact it involves minimal set-up costs. There is no formal process to go through with the IRD, apart from applying to be GST registered (if this is appropriate for your business – see question below). Your business IRD number will be the same as your personal IRD number and will also act as your GST number.

Any profits you make from the business are yours and will be taxed at your personal tax rate. Similarly, any losses you might make are yours and will accumulate until such time as you make a profit or earn an income from another source.

The main disadvantage of being a sole trader is that you are personally liable for all business debts and your other assets – such as home and car – can be put at risk.

And, even though you’re a “sole” trader, the general rules of business apply, such as proper record keeping and health and safety requirements.

2) Partnership: You are in business with others

A partnership is where two or more people set up in business together and share the responsibilities and benefits. This is a common structure for family businesses. Normally, you will have a partnership agreement, detailing the set up and ongoing running of the business. 

Because a partnership is not a separate legal entity, the partnership does not pay tax in its own name. Rather, the profits and losses are distributed to the partners proportionately to their ownership and are taxed at each partner’s personal tax rate.

Disadvantages of a partnership include all partners being jointly and severally liable for all liabilities of the partnership. Also note that a partnership does not offer limited liability protection.

3) Limited liability company: Your business is a separate legal entity and you own shares in it

A company is a completely separate legal entity. It will have separate IRD and GST numbers from those of the company shareholders.

Owners of a company have the advantage of limited liability. If the company fails, the owners will potentially only lose the value of the shares they hold in that company. In practice, the benefit of this limited liability is often reduced, as the individual directors and shareholders can be required to provide personal guarantees for the company’s activities.

Companies do provide flexibility. Income can either be diverted to the shareholders (to be taxed at their personal tax rates) or to be left in the company and taxed at the flat company rate of 28%, potentially resulting in tax savings.

4) Family trust: A trust owns and runs the business on behalf of the beneficiaries, which could include you and your family

Trusts are a less common business structure. With a trust, you don’t personally own the assets (or debts) in the trust. They are held and managed by the trustees, on behalf of the beneficiaries. There are strict rules about the ways a trust can operate and trustees have legal responsibilities, so it can affect the way your business is run and controlled. If you are contemplating a trust structure for your business, you should seek legal advice early on.

Do I pay tax in my first year of business?

There is a common misconception that you don’t pay any tax in your first year of business. While you don’t normally physically pay any tax in year one, if you make a profit, you will incur a tax liability and (here’s the bad news) that will be payable in the second year of business. Of course, all going well, you will also be profitable in year two, so also have tax to pay on those profits… You need to be very clear about what tax is due when. If you’re with Switch Accounting, we will make sure it’s crystal clear.

What is provisional tax?

Provisional tax is not a separate tax. It’s simply a way of paying your income tax progressively throughout the financial year. The provisional tax assessment is based on your previous year’s residual tax, plus 5%. The amount of provisional tax you pay is then deducted from your overall tax bill at the end of the year.

If your residual income tax (i.e. the tax you owe at the end of the financial year) is greater then $2,500 you will have to pay provisional tax the following year.

Here’s an example. John Smith (trading as a sole trader) starts business on 20 April 2012 and makes a net profit of $50,000 for the year ending 31 March 2013. The residual tax on this profit is $8,020 and this tax amount will be due for payment to IRD on 7 April 2014. John will also have to pay provisional tax, which is forward paying the tax for any profit made for the financial year 1 April 2013 – 31 March 2014. Based on the previous year’s residual tax plus 5%, John’s provisional tax will total $8,421 and be paid in three equal instalments during the year. John’s tax payments in year two will, therefore, be:

Tax Type Due Date Amount
2014 First Instalment of Provisional Tax 28 August 2013 $2,807
2014 Second Instalment of Provisional Tax 15 January 2014 $2,807
2013 Residual Tax 7 April 2014 $8,020
2014 Third Instalment of Provisional Tax 7 May 2014 $2,807

How do I go about setting up a business?

The basic points to check off are:

1) Bank accounts

It’s important that you establish a separate business bank account to use for all business transactions. This ensures that business transactions are completely separate from personal transactions.  

You should also set up a separate business savings account, so you can squirrel your tax dollars aside.

If you require bank finance when you go into business, you need to show the bank, in detail, what your business involve: what research you have done; what experience you have; how you will market the businesses; what competition you will face; how you intend to finance the venture; and cashflow forecasts showing the projected financial performance of the business. Switch Accounting has helped many clients through this process, so can help you get your ducks in a row too.

2) Insurance

Just like insuring your home or car, it is important your business is adequately insured against any accidents or loss of equipment – either yours or your customers. Insurance covers to consider include:

  • General cover on your plant or equipment;
  • General cover on your business premises;
  • General cover on your motor vehicle; and
  • Public liability insurance to cover you for any accidents you have or cause on or to other people’s properties.

We suggest you also review your other insurances – such as health, life and personal disability income insurance – when starting business.

Switch Accounting can point you in the direction of several insurance brokers, who have packages tailor made for small business.

3) Marketing

Advertising is just one aspect of marketing. Marketing can take many forms, including print (magazines, newspapers, directories), online (search engine ads, websites), radio spots, TV, billboards, flyers, direct mail and others.

But before you spend money on advertising, make sure you understand what advertising can – and cannot – do for your business. Pause and draw up a plan.

Switch Accounting has contacts with various media outlets – each with packages suited to small business – and is happy to introduce you.

What records do I need keep?

Rules time… You must keep records of all business transactions. Specifically:

  • Receipts and invoices issued by you to customers;
  • Receipts and invoices received from suppliers;
  • Bank statements;
  • Cheque butts and deposit books;
  • Wage records for employees;
  • Details of all returns filed with the IRD;
  • Interest and dividend statements; and
  • Ideally, a cashbook (manual or electronic) and petty cash book.

You must keep a receipt or invoice for all purchases you make. For any purchases over $50, you must keep a full tax invoice that clearly states the name and GST number of the supplier, the date the invoice was issued, a description of the goods or service, and the amount payable (including any GST content).  And, sorry, but an Eftpos receipt does not count as a tax invoice.

You have probably heard of the seven-year rule. Well, it is correct. The IRD require you to keep all business records, including any records stored in an electronic format, for a minimum of seven years from the end of the tax year to which they relate.

We love clients who keep all their business records in date order and as tidy as possible. By keeping accurate and tidy records, they – and we – can find any paperwork quickly. It also means you’re not paying us to wade through a shoebox of invoices, when we could be spending time adding value to your business.

Do I need to register for GST?

If your turnover (sales) is more than $60,000 – or you think it will be more $60,000 in any 12-month period – you must register for GST. If your turnover will not be more than $60,000 within a 12-month period, you don’t have to be GST registered, but you can voluntarily register. Talk to us at Switch Accounting about whether voluntary registration will benefit you.

How is GST calculated?

To add GST to an amount, multiply the amount by 1.15. (For example the GST exclusive amount is $100: 100 x 1.15 = $115.)

To calculate the GST exclusive value from the GST inclusive amount, multiply the amount by 20 and divide by 23. (For example, if the GST inclusive amount is $115: 115 x 20 ÷23 = $100.)

How does ACC work?

ACC levies are calculated based on your assessable earnings and an ACC-specified rate, based on the industry you work in. ACC will calculate your levies once your first income tax return is filed with the IRD. They will then invoice you for the past year, as well as the upcoming year, based on what they think your income will be – much the same way as provisional tax works.

What is KiwiSaver and how does it work?

KiwiSaver is a voluntary, work-based savings initiative to help New Zealanders with their long-term saving for retirement. It’s designed to make it easy for people to get into the habit of saving regularly.

If you are self-employed and want to become part of the scheme, you need to choose a KiwiSaver provider and apply directly to them. The scheme provider you choose will advise the IRD that you have joined. You’ll then need to agree with your scheme provider how much you want to contribute.

Switch Accounting is not able to advise you on a suitable scheme provider, but we can introduce you to financial advisors who can help you.

What counts as a claimable expense?

Expenses are generally claimable as a business expense when there is a direct link between that expense and the generation of business income. For example: 

  • Day-to-day business expenditure (such as rent, stationery, power, etc) will normally be deductible. But some expenses (such as entertainment, legal fees and motor vehicles) are subject to specific rules.
  • Expenditure of a capital/asset nature (e.g. the purchase of a new computer) is not fully deductible in the year of purchase, but rather is subject to depreciation.
  • Expenditure of a private or domestic nature is not deductible, except where it forms part of a home office claim.

What home office expenses can I claim?

If you have an office at home, you will be able to claim a portion of your household costs. These costs include:

  • Interest costs on your mortgage (but not the principal repayments);
  • Rent;
  • Rates;
  • House insurance (not personal insurance);
  • Repairs and maintenance;
  • Electricity and gas; and
  • Telephone and internet.

The proportion claimed as a tax deduction should reflect the area of the house used for the home office. You can determine the apportionment based on the floor space area used for the office, divided by the total area of the house. For example, if the office is 16m2 and the house is 160 m2, then 10% of the total costs of the house can be used as an expense of the business.

How tricky is it to change accountants?

Contrary to popular belief, it is easy to change accountants. If you are unhappy with your existing accountant, then find out who else is out there. There is no point putting up with any service provider who is not performing. If you want to pop into Switch Accounting or give us a call, we are very happy to talk through how we work and how we might be able to support your business. If you like what you hear, we can take it from there – including contacting your old accountant and organising for your records to be sent direct to us (if that’s your preference).

© 2018 Switch Accounting Limited.