Yes, there are a whole host of tax issues to think about. But if you break it all down, and seek advice from your accountant, its not that bad.
Here is a simple summary of what you need to be aware of:
You pay income tax on your net taxable income each year. That is the difference between your business income and any business expenses that you can offset against business income.
A word of caution: you can’t claim for things that are genuinely personal expenses. Only expenses that relate to helping the business earn money. Even then, its not that simple.
For example, you probably can’t claim 100% of entertainment expenses. Likewise you probably can’t claim that all expenses involved in running a home office relate to the business.
Depreciation is another thing to be aware of: This is where you claim the cost of plant and equipment over a period of years depending on the useful life of the item. Your accountant will deal with this for you in your end of year accounts. You can claim depreciation as a business expense, and offset it against your business income, thereby paying less tax.
A minor asterix though – depreciation is there for a reason and at some stage you will actually have to replace the items you are claiming depreciation on.
Provisional Tax and Accounting Income Method (AIM)
Provisional tax is a way of spreading out your tax during the year rather than having to pay one lump sum at the end. It is actually income tax, but is called “provisional' because it is not set in stone – its just an estimate based on what you achieved in year one plus 5% (quite why 5% I don’t know). Once your final results for year two are known you will either pay a terminal tax payment, or get a refund if you haven’t done as well as you did in year one.
There is now another excellent option for small businesses:
Accounting income method (AIM) introduces a pay-as-you-go option to make provisional tax payments more in line with what the business actually earns rather than just taking the previous year’s figures and adding 5%.
AIM is integrated into accounting software packages such as Xero and MYOB, so small businesses can calculate the tax easily. At the end of each reporting period, your accounting software will calculate the tax obligations owed based on cash flow and expenses, and allow you to file a statement directly to Inland Revenue. If a business' profit drops or they make a loss, which means they overpay tax, then they can get a refund straight away through their statement of activity.
AIM is available to small businesses with a turnover under $5 million a year. It is particularly suited to businesses that are new, growing, have fluctuating profits, have irregular or seasonal income or find it hard to accurately forecast their income.
For GST registered businesses that report on GST monthly, AIM will also be reported and paid monthly.
Accident Compensation Corporation (ACC) levies
All businesses pay an annual levy to ACC to cover workplace injuries to any employees and yourself.
Levies will vary depending on the risk that your particular industry poses.
Goods and Services Tax (GST)
You have to register with Inland Revenue to pay GST if your annual turnover is $60,000 or more.
Basically, you will be adding GST at 15% to everything you sell, and claiming the GST off everything you buy for the business. If the GST on your sales is higher than the GST you’ve paid on your expenses, then you’ll have to pay the net amount to IRD in your GST return.
When you first start in business it could be that your expenses initially are higher than your sales, so you’ll receive a refund. But ultimately you want to be paying GST because that means your sales are greater than your expenses.
If in doubt, your accountant can help you with your GST returns, as there are some matters that will require adjustment from time to time, such as zero rated supplies.
Pay As You Earn (PAYE)
If your business employs staff, or if you pay yourself a salary, you’ll have to deduct PAYE tax from their wages or salaries and pay this to Inland Revenue every month.
Employer Superannuation Contribution Tax (ESCT)
ESCT has to be paid on contributions your business makes towards your employee’s KiwiSaver funds.
Likewise, if you have an employee who is still paying off a student loan, the same type of system will apply.
Fringe Benefit Tax (FBT)
Your business will have to pay Fringe Benefit Tax if it provides benefits or perks to employees as part of their employment.
The types of thing covered are private use of a vehicle, parking costs, discounts on your goods or services, and gifts/prizes.
That is a basic summary. It can be way more complicated than that. The key thing is to make sure you are meeting your tax obligations on an ongoing basis, and that is where your accountant comes in.
Call us with any tax queries and we can help you decide if you need specific advice or not. firstname.lastname@example.org or phone 03-4500000.