Tax is actually a relatively simple thing to work out, once you know what you're doing.
It can be easy to put it off when you don't know what's required or you're unsure of how to set yourself up to make the process easier.
This article sets out what you need to know to stop yourself getting in a panic at the end of the financial year, specifically:
- Key dates
- The types of taxes you'll need to pay and which are relevant to you:
- Business Income Tax - required if your business makes a profit.
- Individual Income Tax - required if you receive any income from your business or other means that don't have tax deductions built in, e.g. contracting, rental income, dividends.
- Provisional Tax - required if you had to pay more than $2,500 in income tax in the previous year.
- Goods and Services Tax (GST) - required if you are GST registered.
- How to keep on top of things throughout the year
- How to file your tax return and pay tax
- When to get an accountant.
- Business income returns - 7 July
- Individual income returns - 7 July
- GST Returns (bi-monthly payments) - 28 January, 28 March, 28 May, and every second month thereafter
- Provisional Tax Installments (if you use the standard or estimation option) - 28 August, 15 January, 7 May
Business Income Tax
Each year your taxable income is worked out by deducting expenses (and any available losses) from your gross income. The result will be a net profit or loss.
The tax you are required to pay on the net profit, and how you pay is determined by what business structure you are currently trading under - a company, partnership or sole trader.
If you are trading as a company, your tax rate is 28% and you will need to file a Companies income tax return (IR4) at the end of the financial year. If you're set up as a company, you'll likely pay yourself as a shareholder through drawings, dividend, and salaries to shareholders. You will need to pay Personal Income Tax on this income.
If you are trading as a sole trader (this is quite common for the first year of business), your tax rate will be based on your individual rate and you will need to complete an Individual income return (IR3) at the end of the financial year.
If you're trading as a partnership, the partnership does not pay income tax. You'll need to complete a Partnership income tax return (IR7) to allocate the net profit/loss to its partners. Then each partner will need to complete an Individual income return (IR3), declaring their allocated profit/loss from the partnership and any additional income they have (rent, interest, salary/wage income, etc) and pay their tax using the individual tax rates.
Individual Income Return
If you are paying yourself money out of your business, or your earning money contracting, you will need to file an Individual income tax return (IR3).
For a demo on how to file your IR3, have a look at the 'Filing your IR3 online - demo' on the IRD website. There are a lot of useful resources on the IRD website to help you with your IR3 return.
If you made an income loss in the year, still file an IR3 as you'll be able to offset the loss against your tax for the following year. Read more here.
Anyone who pays income tax may need to pay provisional tax including individuals and companies. It becomes a requirement if you had more than $2,500 tax to pay at the end of the year from your last income tax return. It's an installment-based payment that is designed to spread your income tax over the year, instead of paying it all in one lump sum.
YOU WON'T HAVE TO PAY PROVISIONAL TAX IN YOUR FIRST YEAR OF BUSINESS.
In most cases, you pay provisional tax in three installments during the year, based on what provisional tax option you choose.
How to calculate Provisional Tax: There are a couple of methods, which you can read more about in the provisional tax guide linked below. But the standard and default method is that your provisional tax will equal your previous year's income tax plus 5%. So you would divide that by the number of payments you'll be making in the year (generally 3) to calculate each payment.
You only have to pay GST if you are GST registered.
You need to register for GST if you carry out a taxable activity* and if your turnover:
- was over $60,000 for the last 12 months, or
- is expected to go over $60,000 in the next 12 months, or
- was less than $60,000 but GST is included in your prices, eg, taxi drivers who have to include 15% GST in their taxi fares.
If your turnover is $5,000 or more a month and you expect it to stay at that level all year, you'll need to register for GST.
*You can read more about the definition of a taxable activity here.
IF YOU ARE NOT GST REGISTERED, DO NOT CHARGE GST (DON'T INCLUDE IT IN YOUR INVOICES)!
If you are GST registered, you charge GST on your sales and income and claim it back on your purchases and expenses. GST is added to the price at a rate of 15%.
You must pay the balance of GST received less GST paid to the IRD. You can choose to file GST returns either monthly, two-monthly, or six-monthly.
If you are GST registered, my recommendation is to get an accountant to help make sure you are filing correctly on a regular basis. See the bottom of this page for accountant recommendations.
Keeping on top of things throughout the year
It will save you a whole lot of stress and worry if you can keep on top of your financial records during the year. This means:
- Keeping a record on the money you have coming in. To do this keep a record of your invoices, or any other proof of income.
- Keeping track of the money you have going out by keeping your receipts. To find out what expenses you can claim through your business, visit this link on the IRD website. You will need to keep a copy of any receipts that
- Have a separate bank account for your business. This is one of the first things you should set up, as it will save you the pain of having to go through your personal bank account to work out what's a business expense, and what's not. In the beginning, it doesn't have to be a whole new account for your business, it can just be a different account under your existing banking set up. I recommend getting a separate card too.
- Keep an updated Income Statement. An income statement is also called a Profit and Loss Statement, and it shows the income, expenses and resulting profit or loss of a company during a specific time. You can do this easily using a spreadsheet or software such as Wave apps or Xero. But in the beginning a spreadsheet might be the easiest option!
- Keep an updated Income Statement. An income statement is also called a Profit and Loss Statement, and it shows the income, expenses and resulting profit or loss of a company during a specific time. You can do this easily using a spreadsheet or software such as Wave apps or Xero. But in the beginning, a spreadsheet might be the easiest option.
Here's an example of a simple Income Statement:
- Keep track of the income tax that you owe and set money aside so you can cover the payment at the end of the financial year. You could consider setting up a separate bank account for tax money.
If you can keep on top of these things on a monthly basis, filling your tax returns will be easy!
Filling Tax Returns and Paying Tax
There are two parts to completing your tax return: (1) filing your return, (2) actually paying the money.
If you have an accountant, they'll generally file the return for you. Otherwise, you can do it yourself either by submitting the relevant 'IR' documents through the IRD website or sending it via post. The IRD website has useful resources that set out the details on when and how to file your tax returns.
Paying the money is the easy part. The easiest way to do it is via online banking. You can find a list of the IRD departments as a drop-down payee option. Select the right department ('Income Tax or Provisional Tax', OR 'Goods and Services Tax'.
When to get an accountant
When you're earning enough money to pay for one, and your accounting is getting too much to manage, it's a good time to get an accountant.
I use Beany, and I highly recommend them. You pay a fixed amount per month, depending on you which package you choose. I just have to reconcile my accounts in Xero (this is another cost), and they take care of the rest. You can find out more about them by following this link. And If you use this link to sign up, you'll get $50 off your bill, and so will I 😊.