Businesses can get into trouble by not managing their tax commitments. So it’s important to work out your obligations early on and to regularly put money aside for tax.Resist the temptation to dip into your tax money to pay other expenses – why not think about investing it and earning interest instead?
The main taxes you’ll need to budget for are:
Income tax is based on your net profit at the end of your financial year (your balance date). Net profit is basically your income after taking off any expenses you can claim. The level of tax you pay depends on your business structure. Sole traders pay personal income tax at their individual rate on the profits. Partners pay tax at their individual rate on their share of partnership profits. Companies and Trusts pay tax on net profits at the rate of 30%, but you pay tax at your own rate on any income you get such as wages, distributions or dividends.
If your business income is likely to be over $40,000 a year you must register for GST with Inland Revenue. You can usually choose to pay GST every one, two or six months, either on an invoice issued, or on a payments received basis. Smaller companies often prefer to pay on a payments received basis, because it means you don’t have to pay until after the money has come in. Once you’re registered you need to charge GST on your goods and services. You’ll also need to complete regular returns for Inland Revenue to pay them any GST you‘ve collected, less any GST you’ve paid and are entitled to claim back.
If you employ staff you’ll need to register with Inland Revenue and they’ll send you an information pack about the things you need to do. Basically you’ll be responsible for keeping certain records, making PAYE deductions from wages and paying them to Inland Revenue, and completing monthly returns for Inland Revenue. The tax laws are different for self-employed people, so you need to check your contractual obligations with Inland Revenue if you use contractors.
All businesses and employees pay ACC levies. There are two types of levies – employer levies paid by the business (even if you are the only one working in it) and earner levies paid by employees. Employer levies cover work related injuries, so it’s important your business is recorded in the right category. Earner levies cover non-work injuries, and are paid through PAYE deductions from wages.
Fringe benefits are extras you give employees such as use of a company car, discounts and entertainment. If you provide fringe benefits you’ll need to file FBT returns and pay FBT, but you should also be able to claim it back as a business expense.
RWT is tax paid on income you receive from interest or dividends. It’s usually deducted before you receive the income. Businesses can apply to Inland Revenue for an exemption.
What if the business makes a loss?
If you’re a sole trader or in a partnership a loss can be offset against any other income you may have, or carried over to reduce your tax bill the next year. A company can carry over the loss but can’t transfer it to shareholders unless the company is a Loss Attributing Qualifying Company (LAQC). A trust can also carry over a loss to the next year but can’t transfer it to beneficiaries.
