Why do you pay tax?
Taxes help pay for services that the government provides.
The following blog post is purely informative in nature and is in no way to be taken as financial advice. It is posted for our own records and to help inform others about their obligations when operating business in New Zealand.
myIR – ird.govt.nz
- File tax returns
- Forms & booklets
- Make payments online
You can register your company on myIR as well but you’re currently unable to file a company tax return through it, this has to be done online.
IRD is a bill payer on most banking apps.
Cash books are necessary to keep business records of all income and expenses and is used to calculate GST.
Once you sign up for myIR you will recieve email notifications, however some information will still be sent to you via mail, as the system is still being upgraded.
- Sole Trader
business.govt.nz has a handy tool available to help you decide what business structure is best for you, depending on certain variables such as number of business owners, plans for investment or selling your business, and the likelihood you will incur large costs or debts while running your business.
Tax obligations for each entity
The financial year in New Zealand starts on the 1st of April and ends on the 31st of March.
You must file your tax returns by the end of the financial year, with a due date of the 7th of July.
- Sole Trader – IR3 tax return
- Company – IR4 tax return
- Partnership IR7 tax return
Shareholders may have to file their own IR3 returns in order to declare income gained from companies.
Partnerships file an IR7 and each partner files an IR3 separately which must match up with the partnerships IR7.
Partnerships don’t pay tax, but individuals in the partnership do.
Any tax to pay is due February 7th of the following year. (eg: 31st of March ends 2019, tax will be due Feb 7th 2020)
Provisional tax pays as you go, meaning you put that tax aside as you earn it.
Processing times for filing your tax returns are quicker if you file it online.
Gross Sales: ($98,000)
Net Profit: ($32,000) – You pay tax on this value.
Income Tax Rates
Taxable Income – Tax Rate
$0 – $14,000 – 10.5%
$14,001 – $48,000 – 17.5%
$48,001 – $70,000 – 30%
$70,001+ – 33%
Company tax rate: 28% flat rate
Imputation Tax Credit
Imputation lets a company share the tax it has paid on its income with shareholders when it pays dividends.
Most New Zealand resident companies must keep an imputation credit account (ICA). An ICA is a record-keeping account used to keep track of how much income tax the company has paid, and how many imputation credits it still holds that it can pass on to its shareholders.
Donating to charity
The total donations you claim can’t exceed your taxable income for the year. If they do, you can claim donations up to the amount of your taxable income.
The maximum tax credits you can claim are set out below.
You can claim the lesser of:
- 33.3333% of the total donations you’ve made, or
- 33.3333% of your taxable income.
This applies when residual income tax is greater than $2,500 (Your total tax to pay in one year is greater than $2,500)
Once you meet that threshold, the next financial year you will become a provisional tax payer.
Provisional tax is paid in installments.
There are 4 options to choose from.
Pay up to 6 times per year.
This is an option suited for new businesses, if your business is growing, or if you have irregular/seasonal income.
It can be hard to forecast income accurately.
By using accounting software you are able to pay more/less depending on your profits during the statement dates.
Example provisional tax calculation:
Net profit: ($36,000)
Return filed on time, 7/7/2019
Residual income tax for 2019 tax year will be $5,320
This means your 2020 provisional tax (using standard option) is:
$5,320 x 105% / 3 = 3 payments of $1,862 (April 2019, August 2019, January 2020)
Set aside tax as soon as you earn it.
Whatever year you have more than the threshold, the following year you will start paying provisional tax.
Estimates require you to send secure mail via myIR to ask for adjustments.
Penalties & interest charges can be incurred for wrong estimates until payments are made to cover correct values.
IRD gives information but not advice!
This provisional tax option is often used by accountants who have multiple clients they need to file for, or if your income goes up and down. You must be GST registered to use this option.
Can you switch to AIM?
You can’t just opt-in to AIM.
Apply for the next financial year by the 25th of June.
Early Payment Discount – 6.7%
- Self employed or partner/partnerships & shareholders
- Earn income from a business (not rental income)
- Aren’t required to pay provisional tax in the income year
- Make at least one voluntary payment before end of financial year
- Elect to receive the discount in your tax return
- Haven’t been liable to pay provisional tax in the previous 4 years