StreetSmart Group, Accounting, Chartered Accountants, Business Advisors, Auckland, New Zealand

I'm going to be self employed / in business, so what taxes do I
need to pay and when?

Going into business for yourself is exciting. A not so exciting aspect of it is complying with IRD requirements and paying taxes such as: GST PAYE FBT Income Tax Other Taxes Penalties & Interest What taxes you pay and when will be determined to some extent by your business structure. This article is a summary of the various taxes you are likely to need to consider. Please refer to “Tax Facts” under Smart Resources on this web site for more technical information regarding the various taxes or click here. GST You will need to register for GST (Goods and Services Tax) if your expected annual turnover is expected to exceed $60,000 or once your turnover actually reaches this amount. A business can register for GST even although its turnover is less than $60,000 and there are advantages and disadvantages in doing so. We suggest that you speak to your StreetSMART advisor in order to make an informed decision. SME’s can register for GST on a monthly, two monthly or six monthly basis. If your turnover is fairly low and you are financially disciplined, then we suggest paying GST on a six monthly basis to reduce compliance work. However, if you do not want the amount of GST that you need to pay the Inland Revenue to get too high at any one time, then a two monthly basis may be best. In general GST is payable on the 28th day of the month following the period that applies. If the 28th falls on a weekend or public holiday then payment may be made on the next business day. For example, for the GST period ended 31 May the GST is payable by 28th June or the next business day. Please note that provided your payment is postmarked on the due date then Inland Revenue will accept the payment as being on time. There are two exceptions: for the period ending 30 November GST is payable on 15th January for the period ending 31 March GST is payable on the 7th May. GST is not actually a business cost as GST registered businesses are able to claim back the GST paid on business expenses. If you trade business to business then the GST you charge to your customers is not a cost to them either as they will be able to claim it back from the IRD. If you sell goods and services to consumers who do not use your goods for business purposes then GST is a cost to them and this needs to be consider in setting your pricing strategy. For businesses to claim back the GST paid for goods and services they must have a valid GST invoice issued by the vendor. Good record keeping is therefore important. For more information about GST click here. PAYE If you employ staff, either on a full time or part time basis, then you must register with the Inland Revenue as an employer and deduct PAYE from their wages and salaries. If you use sub-contractors who are not trading as companies then resident withholding tax (RWT) deductions may apply. RWT for contractors is paid to IRD with PAYE deductions for the business. Failure to deduct RWT from contractors may mean that the IRD assess RWT to the employer in addition to the gross contract payments already made. Care needs to be taken with contractors and we suggest you talk to your accountant about this matter to ensure you get it right. PAYE is calculated by using the tables supplied by Inland Revenue, a payroll accounting package or by using the Calculator on the Inland Revenue web-site. If you use the IRD Calculator you can use either Gross or Net Pay to calculate the PAYE. www.ird.govt.nz/calculators/tool-name/tools-p/calculator-paye.html?id=righttabs Check the Tax Facts on the SMART Resources of our website for the dates that PAYE is payable to IRD. Please note that provided your payment is postmarked on the due date then the Inland Revenue accepts the payment as being on time. FBT FBT (Fringe Benefit Tax) is payable on benefits received by employees, directors or shareholders of companies for which other taxes have not been charged. FBT is a complicated area and needs very careful tax planning in order to avoid paying more taxes than needed or inadvertently incurring a FBT liability. Please consult your StreetSMART advisor if unsure whether you may be liable to pay FBT and to discuss ways to minimize your exposure. FBT can be paid either annually or quarterly. If annual PAYE deducted is less than $500,000 then annual FBT returns can be filed, otherwise FBT returns must be made quarterly. FBT periods ending 30 June, 30 September and 31 December are paid on 20th of the month following. For the period ended 31 March FBT is payable on 31 May for both quarterly and annual FBT payers.. For more detailed information click here. INCOME TAX If you earn any income from a business or profit making activity, then you or the entity you control will be liable for income tax and will need to submit an income tax return every year. Most tax payers file their income tax return to cover the period 1 April until 31 March each year. A taxpayer may apply for an alternate tax year but must have valid reasons for the application, such as farming tax payers where 30 June is the natural farming cycle year end. Most tax payers with a 31 March balance date have to file their income tax return by 7 July of each year. However, if you have an accountant who is a registered tax agent then you will automatically receive an extension of time to file your return and have a full 12 months to the following 31 March to file your income tax return with the IRD. If you are late filing your income tax return then you will lose your extension of time to file and may also be charged late filing penalties. To regain the extension of time to file, the next income tax return must be filed by 7 July. If a tax payer has residual income tax (tax payable after source deductions are taken into account) to pay of more than $2,500, then in most cases the tax payer will also have to pay income tax in advance called Provisional Tax. Refer to Provisional Tax on Tax Facts or click here for more information about Provisional Tax. The final income tax to pay in any tax year after taking in to account provisional taxes and other taxes already paid is called Terminal Tax. Terminal taxes for most tax payers are due on 7 February the following year. However, if you have a tax agent and extension of time to file then terminal tax is usually payable on 7 April. Taxable business income comprises total business revenues (excluding GST) less total deductible business expenditure (excluding GST). Be aware that some business expenses are not tax deductible for income tax purposes. Also, capital expenditure such as purchase of fixed assets is not deductible for income tax purposes (although the cost of the asset may be tax deductible over a period of time by way of a depreciation deduction.) Refer to Depreciation on Tax Facts. Income tax rates depend on the type of entity paying the tax. From 1 April 2009 companies pay tax at 30%, trusts pay tax at 33% and individuals pay tax at rates varying from 12.5% to 38% depending on the level of income they earn. We strongly recommend that every business works with a competent chartered accountant to file their annual income tax returns. The various tax laws change regularly and it is usually false economy to try to save money by preparing your own business tax returns. A good accountant will be able to advise you on the many legal ways to claim deductions and structure your affairs to minimise your income tax payable. OTHER TAXES There are other taxes payable, such as: Resident Withholding Tax (RWT) This is a tax deducted at source on interest and dividends paid to a tax payer. A common example is RWT deducted by your bank on interest payments to you. You should tell the payer which rate of tax should be used, which depends on your tax structure and level of taxable income. Refer to RWT on Tax Facts or click here for further information. Non Resident Withholding Tax This is tax deducted at source on interest and dividends paid to a Non Resident of New Zealand. The rate will depend on the type of income and the country of residence. PIE’s Income earned in a Portfolio Investment Entity’s (PIE) investment has tax deducted at source. The tax rate can be either 0%, 19.5% or 30%. So long as the correct tax rate has been used this is a final tax and the income should not be included in your income tax return. Using a PIE for investments can be very beneficial if you are a tax payer usually in the 33% or 38% tax bracket, as tax will be deducted at a top rate of 30% on income taxed by the PIE. PENALTIES AND INTEREST The IRD are very good at penalising the tax payer if they are late making a payment or make a mistake when filing a tax return. Penalties are charged on either filing returns after due date or if payments are made late. A common penalty charged is $250 for filing late returns. On late payment of tax 4% is charged as an initial penalty, followed by 1% for every month the amount is not paid. This means that late payment penalties may add up to more than 17% per annum and as penalties are compounding the additional amounts to pay can become enormous. IRD Penalties are not deductible for tax purposes. If you cannot meet a tax payment by due date it is best to be proactive by entering into a payment arrangement with IRD to minimise these penalties. It is important that you liaise with your StreetSMART advisor as soon as you are aware that you may not be able to make a tax payment by due date. If you enter and honour a formal arrangement to pay overdue tax the IRD will usually remit some of the penalties charged. Interest is also charged by Inland Revenue on all late payments. The interest rate is fairly high compared to what you can borrow funds from the bank secured by residential property. Interest charged by the IRD is generally tax deductible to businesses, but not to individual taxpayers. For more information please refer to Tax Facts – Tax Payer Penalties or click here.

Going into business for yourself is exciting. A not so exciting aspect of it is complying with IRD requirements and paying taxes such as:

What taxes you pay and when will be determined to some extent by your business structure. This article is a summary of the various taxes you are likely to need to consider. Please refer to “Tax Facts” under Smart Resources on this web site for more technical information regarding the various taxes or click here.

GST

You will need to register for GST (Goods and Services Tax) if your expected annual turnover is expected to exceed $60,000 or once your turnover actually reaches this amount. A business can register for GST even although its turnover is less than $60,000 and there are advantages and disadvantages in doing so. We suggest that you speak to your StreetSMART advisor in order to make an informed decision.

SME’s can register for GST on a monthly, two monthly or six monthly basis. If your turnover is fairly low and you are financially disciplined, then we suggest paying GST on a six monthly basis to reduce compliance work. However, if you do not want the amount of GST that you need to pay the Inland Revenue to get too high at any one time, then a two monthly basis may be best.
In general GST is payable on the 28th day of the month following the period that applies. If the 28th falls on a weekend or public holiday then payment may be made on the next business day. For example, for the GST period ended 31 May the GST is payable by 28th June or the next business day. Please note that provided your payment is postmarked on the due date then Inland Revenue will accept the payment as being on time.

There are two exceptions:

for the period ending 30 November GST is payable on 15th January
for the period ending 31 March GST is payable on the 7th May.

GST is not actually a business cost as GST registered businesses are able to claim back the GST paid on business expenses. If you trade business to business then the GST you charge to your customers is not a cost to them either as they will be able to claim it back from the IRD. If you sell goods and services to consumers who do not use your goods for business purposes then GST is a cost to them and this needs to be consider in setting your pricing strategy.

For businesses to claim back the GST paid for goods and services they must have a valid GST invoice issued by the vendor. Good record keeping is therefore important.

For more information about GST click here.

PAYE

If you employ staff, either on a full time or part time basis, then you must register with the Inland Revenue as an employer and deduct PAYE from their wages and salaries.

If you use sub-contractors who are not trading as companies then resident withholding tax (RWT) deductions may apply. RWT for contractors is paid to IRD with PAYE deductions for the business. Failure to deduct RWT from contractors may mean that the IRD assess RWT to the employer in addition to the gross contract payments already made. Care needs to be taken with contractors and we suggest you talk to your accountant about this matter to ensure you get it right.

PAYE is calculated by using the tables supplied by Inland Revenue, a payroll accounting package or by using the Calculator on the Inland Revenue web-site. If you use the IRD Calculator you can use either Gross or Net Pay to calculate the PAYE.
www.ird.govt.nz/calculators/tool-name/tools-p/calculator-paye.html?id=righttabs

Check the Tax Facts on the SMART Resources of our website for the dates that PAYE is payable to IRD. Please note that provided your payment is postmarked on the due date then the Inland Revenue accepts the payment as being on time.

FBT

FBT (Fringe Benefit Tax) is payable on benefits received by employees, directors or shareholders of companies for which other taxes have not been charged.

FBT is a complicated area and needs very careful tax planning in order to avoid paying more taxes than needed or inadvertently incurring a FBT liability. Please consult your StreetSMART advisor if unsure whether you may be liable to pay FBT and to discuss ways to minimize your exposure.

FBT can be paid either annually or quarterly. If annual PAYE deducted is less than $500,000 then annual FBT returns can be filed, otherwise FBT returns must be made quarterly. FBT periods ending 30 June, 30 September and 31 December are paid on 20th of the month following. For the period ended 31 March FBT is payable on 31 May for both quarterly and annual FBT payers..
For more detailed information click here.

INCOME TAX

If you earn any income from a business or profit making activity, then you or the entity you control will be liable for income tax and will need to submit an income tax return every year.

Most tax payers file their income tax return to cover the period 1 April until 31 March each year. A taxpayer may apply for an alternate tax year but must have valid reasons for the application, such as farming tax payers where 30 June is the natural farming cycle year end.

Most tax payers with a 31 March balance date have to file their income tax return by 7 July of each year. However, if you have an accountant who is a registered tax agent then you will automatically receive an extension of time to file your return and have a full 12 months to the following 31 March to file your income tax return with the IRD. If you are late filing your income tax return then you will lose your extension of time to file and may also be charged late filing penalties. To regain the extension of time to file, the next income tax return must be filed by 7 July.

If a tax payer has residual income tax (tax payable after source deductions are taken into account) to pay of more than $2,500, then in most cases the tax payer will also have to pay income tax in advance called Provisional Tax. Refer to Provisional Tax on Tax Facts or click here for more information about Provisional Tax.

The final income tax to pay in any tax year after taking in to account provisional taxes and other taxes already paid is called Terminal Tax. Terminal taxes for most tax payers are due on 7 February the following year. However, if you have a tax agent and extension of time to file then terminal tax is usually payable on 7 April.

Taxable business income comprises total business revenues (excluding GST) less total deductible business expenditure (excluding GST). Be aware that some business expenses are not tax deductible for income tax purposes. Also, capital expenditure such as purchase of fixed assets is not deductible for income tax purposes (although the cost of the asset may be tax deductible over a period of time by way of a depreciation deduction.) Refer to Depreciation on Tax Facts.

Income tax rates depend on the type of entity paying the tax. From 1 April 2009 companies pay tax at 30%, trusts pay tax at 33% and individuals pay tax at rates varying from 12.5% to 38% depending on the level of income they earn.

We strongly recommend that every business works with a competent chartered accountant to file their annual income tax returns. The various tax laws change regularly and it is usually false economy to try to save money by preparing your own business tax returns. A good accountant will be able to advise you on the many legal ways to claim deductions and structure your affairs to minimise your income tax payable.

OTHER TAXES

There are other taxes payable, such as:

Resident Withholding Tax (RWT)
This is a tax deducted at source on interest and dividends paid to a tax payer. A common example is RWT deducted by your bank on interest payments to you. You should tell the payer which rate of tax should be used, which depends on your tax structure and level of taxable income. Refer to RWT on Tax Facts or click here for further information.

Non Resident Withholding Tax
This is tax deducted at source on interest and dividends paid to a Non Resident of New Zealand. The rate will depend on the type of income and the country of residence.

PIE’s
Income earned in a Portfolio Investment Entity’s (PIE) investment has tax deducted at source. The tax rate can be either 0%, 19.5% or 30%. So long as the correct tax rate has been used this is a final tax and the income should not be included in your income tax return. Using a PIE for investments can be very beneficial if you are a tax payer usually in the 33% or 38% tax bracket, as tax will be deducted at a top rate of 30% on income taxed by the PIE.

PENALTIES AND INTEREST

The IRD are very good at penalising the tax payer if they are late making a payment or make a mistake when filing a tax return.

Penalties are charged on either filing returns after due date or if payments are made late. A common penalty charged is $250 for filing late returns. On late payment of tax 4% is charged as an initial penalty, followed by 1% for every month the amount is not paid. This means that late payment penalties may add up to more than 17% per annum and as penalties are compounding the additional amounts to pay can become enormous. IRD Penalties are not deductible for tax purposes.

If you cannot meet a tax payment by due date it is best to be proactive by entering into a payment arrangement with IRD to minimise these penalties. It is important that you liaise with your StreetSMART advisor as soon as you are aware that you may not be able to make a tax payment by due date. If you enter and honour a formal arrangement to pay overdue tax the IRD will usually remit some of the penalties charged.

Interest is also charged by Inland Revenue on all late payments. The interest rate is fairly high compared to what you can borrow funds from the bank secured by residential property. Interest charged by the IRD is generally tax deductible to businesses, but not to individual taxpayers.

For more information please refer to Tax Facts – Tax Payer Penalties or click here.

	FAQ's

I'm going to be self employed / in business, so what taxes do I need to pay and when?

GST

PAYE

FBT

INCOME TAX

OTHER TAXES

PENALTIES AND INTEREST

I'm going to be self employed / in business, so what taxes do I
need to pay and when?