Filing and paying taxes on time are essential for compliance with the Inland Revenue Department (IRD). Good record-keeping, budgeting, and planning play a significant role in managing your tax position effectively.
Business Structures and Taxation
Sole Trader
A sole trader operates under their personal IRD number. The income tax and GST returns of the business are linked to the individual's tax number. However, in case of tax defaults, personal assets may be at risk. Sole traders file an IR3 tax return based on their business profit.
Company
A company has its own non-individual IRD number. This is used for filing employment information, imputation credits, and fringe benefits tax. A company can pay profits as shareholder salary, potentially allowing for tax optimization. Companies file an IR4 tax return.
Partnerships
A partnership also has a non-individual IRD number, but it does not pay income tax directly. Instead, profits and losses are distributed to partners, who report them individually. Partnerships file an IR7, which also applies to look-through companies.
A company is a legal entity, while a partnership is based on an agreement where partners share liability. If one partner defaults, the other remains responsible for debts (joint and several liability). Sole traders cannot use a trade name, but partnerships and companies can.
Record Keeping for Tax Compliance
Good record-keeping is vital for tax compliance and supporting your claims to IRD. Key records include:
- Receipts and invoices (both issued and received)
- Bank statements
- Travel expense logs
- Worksheets showing tax calculations
Records must be retained for at least seven years. IRD provides templates for invoices, credit notes, and other financial documents. Using precise search terms on the IRD website can help locate relevant resources.
Business Expenses and Deductions
Expenses fall into three categories:
- Revenue expenses (day-to-day business costs)
- Capital expenses (assets over $1,000, depreciable)
- Non-deductible expenses (fines, penalties, company registration fees, etc.)
Vehicle Expenses
A logbook helps track business-related mileage. Expenses can be claimed either as actual costs or using IRD's kilometre rate. Without a logbook, up to 25% of vehicle expenses can typically be claimed.
Home Office Deductions
Expenses like rent, power, insurance, and mortgage interest (not principal) may be deductible. Deductions can be based on either the actual cost method or IRD's square meter rate. Internet and phone expenses should be reasonable—typically, 50% is accepted for home-based businesses.
Travel and Accommodation Expenses
Keep detailed records of travel itineraries. If a business trip includes personal travel, adjustments must be made.
Other Important Tax Considerations
Wages and ACC
IRD provides salary and wage details to ACC. Businesses can deduct the gross salary and wages paid to employees. To streamline record-keeping, highlight key items on receipts and write notes on the back of receipts. Receipts are required for expenses over $50.
GST Considerations
A business pays tax on net profit after deducting expenses. If GST-registered, the GST component is excluded from taxable income. If GST registration occurs midway through the financial year, income must be correctly split between GST-inclusive and GST-exclusive periods.
Provisional Tax
Provisional tax is a system for paying income tax throughout the year rather than in a lump sum. Businesses must pay provisional tax if their tax bill exceeds $5,000 annually.
Payment Options
- Standard Option – Based on last year's residual income tax plus 5%.
- Estimation Option – Allows businesses to estimate tax liability, but underestimating may incur interest charges.
Filing Period - Tax Agents
Different filing periods are available for tax agents, which differ from those for individual taxpayers.
Keeping accurate records, understanding deductions, and planning for tax payments can help prevent financial stress and potential IRD penalties. Stay organized, plan ahead, and maintain proper documentation to ensure smooth interactions with IRD and avoid unexpected surprises.