One of the most important responsibilities of being a business owner is correctly managing your tax responsibilities. You might have accountants and payroll software to help with your tax affairs. Still, it is important that you understand the different taxes you and your business must pay. This article explains your common tax responsibilities as a small business owner in New Zealand.
An Inland Revenue Department (IRD) number is a unique number attached to a taxpaying entity, like a person, company or partnership. The first step in managing your business' tax affairs is registering an IRD number.
You should already have a personal IRD number for your individual tax responsibilities. If you are running your business as a sole trader, you simply use your IRD number.
If you are a member of a partnership, you and the other partners will also use your personal IRD numbers. However, the partnership itself should also have its own IRD number. You and the other partners also need to declare your share of the partnership income in your individual tax returns. Still, the partnership itself will file a tax return allocating the profits or loss to the different partners. This is despite the partnership itself not paying income tax.
Businesses pay income tax on their profits, that is, their income minus their expenses. For this reason, it is crucial to keep a detailed record of your business expenses. Doing so helps minimise tax payable by maximising deductions.
You can claim a range of different expenses as deductions, some of which you can only deduct a certain percentage of. Also, you can find a more detailed look at business deductions on the IRD website.
Additionally, the rate of tax your business will pay on its profits depends on how your business is structured. Suppose you operate your business as a sole trader. In that case, you are a member of a partnership or a beneficiary of a trust in your personal capacity. You simply include your business income with the rest of your personal income and pay tax at your personal income tax rate.
New Zealand's personal income tax rates as of 1 April 2021 are set out below:
|For each dollar of income||Tax Rate|
|Up to $14,000||10.5%|
|Over $14,000 and up to $48,000||17.5%|
|Over $48,000 and up to $70,000||30%|
|Over $70,000 and up to $180,000||33%|
|Remaining income over $180,000||39%|
Most businesses will file an income tax return at the end of their first year of operation and pay their tax owed as a lump sum at the end of the year. Going forward, businesses will typically pay their income tax in instalments throughout the year. This is known as provisional tax.
For companies, the corporate income tax rate is 28%.
Goods and Services Tax
Goods and services tax (GST) is a 15% tax added to the cost of most goods and services. If you expect your business to turn over more than $60,000 in a year, you need to register for GST. Even if you turn over less than this amount, you can still choose to register for GST.
When registering for GST, you need to choose how frequently you will file GST returns to IRD and your business' accounting method. For example, you can choose to file GST returns when invoices are issued or when they are paid.
Once registered for GST, you will also need to:
- charge GST to customers;
- file GST returns to IRD;
- pay any GST owed to IRD; and
- keep GST records.
One of the key advantages of registering for GST, besides not being charged penalties for failing to do so, is that it allows you to be refunded for GST your business has paid to suppliers. This is because GST is a tax on consumers, rather than businesses.
Additionally, you will also need to register your business as an employer for tax purposes if you employ staff. You can do this through myIR. As an employer, you need to deduct tax from your employees' pay each pay period. This is referred to as pay as you earn ('PAYE') and prevents employees from paying their income tax bill as a lump sum at the end of the year. You also need to withhold payments to some types of contractors.
Additionally, to know how much tax to deduct from your employees' pay, your employees need to provide you with a completed tax code declaration (IR330) when they start their employment with you. This will provide you with the information needed to determine how much to withhold from their pay. This information is useful, not only for your employees' income tax liability but also other liabilities such as:
- child support payments;
- student loan repayments; and
- KiwiSaver contributions.
If your employee does not provide you with a completed IR330, you need to deduct 45% of your employees' pay.
KiwiSaver and ESCT
While not technically a tax, as an employer, you are also responsible for making KiwiSaver contributions on behalf of your employees. When a new employee starts with your business, they should provide you with an IR346K form, which you then provide to IRD before their first payday.
If your employee is over 18, under 65 and is not already enrolled in KiwiSaver, you will need to enrol them. The IRD website provides helpful steps to enrol your employees into KiwiSaver. Alternatively, if your new employee is already in KiwiSaver, they should complete a KS2 KiwiSaver deduction form telling you the rate of deductions you need to take from their pay.
Each time you pay any employees in a KiwiSaver scheme or complying superannuation fund, you need to withhold at least 3% of their pay and pay it as a contribution into their fund. These contributions are themselves taxed at a rate based on their income and length of service. This tax is known as Employer Superannuation Contribution Tax (ESCT). You can work out your employee's ESCT rate by using the IRD's tool.
Good record keeping is an essential part of managing your business' tax responsibilities. As a general rule, you should be keeping records of all income and expenses for at least seven years. Examples of records you should keep updated and filed include:
- tax invoices and receipts;
- payroll and employment records;
- asset registers and depreciation schedules; and
- bank statements, cheque and deposit books.
If you have registered your business for GST, you will need to have tax invoices for expenses over $50 to claim back the GST paid.
As a business owner, you are responsible for understanding and meeting your tax responsibilities. This includes registering your business with the IRD, keeping updated records, and withholding payments from employees to meet their tax and KiwiSaver obligations.