All You Need to Know About Tax
As they say – there are only two certainties in life, Death and Taxes. In this section, we give you the low down on all you need to know about taxes.
Taxing sole traders
What is a sole trader?
A sole trader is a person trading on their own. They control, manage and own the business.
How does it work?
A sole trader usually has no formal or legal processes to set up the business. The owner/manager is personally entitled to all profits, but is also personally liable for all business taxes and debts.
Drawings
If you are a sole trader you're probably not paying yourself a wage, but simply taking money from the business when you need it for personal use. These takings are called "drawings". Drawings are not a deductible business expense when calculating your profit. Drawings are a part of your profit and taxed accordingly.
Record your drawings in your cashbook so that you can reconcile your cashbook with your bank statements, ensuring that there is enough money in the business to cover any bills owing.
Tax rates for sole traders
A sole trader is taxed at the individual rates as shown below.
| Taxable income ($) | Rate of tax (for every $1 of taxable income) |
| up to $38,000 | 19.5 cents |
| $38,001 to $60,000 inclusive | 33 cents |
| $60,001 and over | 39 cents |
Example
| Sales | $177,000 |
| less all deductible expenses | $108,500 |
| Net profit (taxable income) | $68,500 |
| Tax to pay ($) | ||
| Net profit between $0 and $38,000 inclusive | 38,000 x 19.5% = | 7,410 |
| Net profit above $38,000 up to and including $60,000 | 22,000 x 33% = | 7,260 |
| Net profit over $60,000 | 8,500 x 39% = | 3,315 |
| Tax on taxable income of $68,500 | = | $17,985 |
Taxing partnerships
In a partnership, two or more people run a business together. Each partner contributes something to the business and, in return, each partner shares in any profit or loss. Each partner is also liable for any debt within the partnership.
How a partnership works
A formal partnership agreement can be prepared.
Partners share responsibility for running the business, and share the profits and losses equally, unless an agreement says otherwise.
The partnership distributes its income to the partners, who each pay tax on their own share.
The partnership itself does not pay income tax on its profits. Instead:
- at the end of each year the net profit (without taking into account partners' drawings) is distributed between each partner
- each partner then pays income tax on their share of the profit in their individual tax return, along with any other income they may have received.
Paying a salary to a partner
A partner who works for the partnership can be paid a salary or wage providing there is a bona fide contract. The contract must be in writing and agreed to by all partners and PAYE must be deducted. Salaries or wages paid to partners are a deductible expense in the partnership's Income tax return - partnerships (IR7) . The partner must include the salary or wage in their Individual tax return (IR3) along with their share of any profit or loss from the partnership.
Reallocation of payments for tax purposes because of unreasonable or excessive payments
If IRD consider that any payment, salary or wage, share of profit or loss, or other income paid to a relative or associated person is unreasonable or excessive, they can reallocate these for tax purposes.
To consider whether the payment or share in the profit or loss is reasonable, They look at all of the following:
- the nature and extent of the services provided
- the value of the partners' contributions made by way of services or capital
- any other relevant matters.
They cannot reallocate a partners' share of income or losses if there is a bona fide contract.
For more information and assistance contact one of our business facilitators.
Taxing companies
To form a company you need to register (incorporate) it under the Companies Act. To do this you need to
- contact the Companies Office
- pay for a legal registration process
More Info.
How a company works
The company owns the assets and liabilities of the business and is responsible for any debts. The shareholders' liability for losses is limited to their share of ownership in the company.
Company tax rate
Profits derived by a company are taxed at the company tax rate of 33 cents in the dollar.
Companies can distribute money in three ways:
- Shareholder-employees can periodically draw money from the company. At the end of the year, the company calculates a salary amount on which the shareholder will have to pay income tax.
- Shareholder-employees can be paid a regular salary (at least monthly) with PAYE taken out in the normal way. These salaries are deductible as a business expense for the company.
- The company can pay dividends to shareholders out of the profits that remain after tax. It may also attach tax credits to these dividends called imputation credits.
Common Tax Payments
In most small business, GST and Employer related tax obligations can create some difficulty and need to be addressed with care. If you are not familiar with the New Zealand business tax system, it is best to seek some expert assistance in this matter. The Impac business workshops, offer some introductory information on basic tax and is helpful for an initial understanding.
Goods and Services Tax – GST
Goods and services tax (GST) is a tax on most goods and services in New Zealand, most imported goods, and certain imported services. GST is added to the price of taxable goods and services at a rate of 12.5%.
GST is a tax that you collect on behalf of the government. You charge GST in your sales and income and claim it back for your purchases and expenses. You then calculate the difference in your GST return to work out if you have to make a GST payment to us or if your receive a GST refund from us. GST is charged at 12.5% for sales and income. GST is calculated by dividing the sales and the income figure by 9. GST is claimed at 12.5% for purchases and expenses. GST is calculated by dividing the purchases and expenses figure by 9.
The benefits of being GST registered are noted below.
• Completing regular GST returns helps keeping your records up-to-date and accurate.
• Generally, businesses prefer to work with GST-registered businesses.
• Charging GST enables you to work with this tax money over your taxable period (one-monthly, two-monthly or six-monthly) before filing your GST return by the due date and, if applicable, paying GST back to us.
• If you purchase goods and services from someone who's GST-registered, you'll be charged GST and you'll be able to claim it back sooner than waiting until your income tax return is filed.
Employer Tax Obligations
When a business starts employing staff, they must register with the Inland Revenue Department as an employer. They must also decide whether staff are employees or self-employed contractors as the tax treatment for each is different. As an employer there are things that they must do or check when a staff member starts or stops working, when the business changes or ceases or if they want to employ their spouse or any foreign workers.
Employers must deduct PAYE, including tax on schedular payments (formerly withholding payments) from payments made to staff or contractors. Deductions may also be needed for student loan repayments, child support, Kiwisaver, or any benefits, bonuses or other allowances that you pay.
For assistance with GST, Employer tax obligations, and registration, contact one of our business facilitators.
Other Links:
For more information on tax refer to the Inland Revenue website on the link below:
www.ird.govt.nz