(tax saving tips – 5 minutes)
There are two things in life that are certain: death and taxes. Or so the saying goes. For salary workers, your employers will pay taxes for you in the form of Pay As You Earn (PAYE) salaries. For business owners, tax is more tricky! In this article, we’re going to take a look at some ways to save up for taxes. That way, you can be a responsible business owner and pay your taxes on time!
Tax saving tips #1: Open up a tax savings account
In an older article we wrote about bank accounts you should set up, we suggested setting up accounts for both income tax and GST (if you’re GST registered). Well, we’re going to repeat that same advice here again! Have separate bank accounts for your tax savings to make sure you’re ready to pay taxes!
Keep this bank account separate from your daily spending business account. This way you won’t run the risk of spending your tax money! This greatly reduces the risk of incurring interest and penalties on your tax bill.
Get in to the habit of putting away money for taxes. The simplest way to do this is to put aside about 30% (depending on your local tax rate) of your profit into the tax savings account. At the end of each month, you should review your monthly profit and loss report. If there is profit, calculate 30% of the profit and deposit that money into your tax account!
If you’re GST registered, you can do the same. As soon as your client pays you money, set aside 15% (or your local GST rate) of that money and put it in the tax account.
Tax saving tips #2: Avoid interest and penalties!
This one is pretty obvious. If you don’t pay taxes on time (like your GST payment dates or your provisional tax dates), you’ll get penalties. If you keep on waiting, then the tax department will charge you interest on your balance! The best way to avoid paying interest and penalties is to… well, pay taxes on time.
However, sometimes your cash flow is tight and you can’t afford to pay taxes on time. Perhaps a big supplier is demanding immediate payment. Or you went on a hiring spree and don’t have the cash to spare. In which case, you should opt for an installment arrangement. Most tax authorities will allow this option – since its better than you not paying your taxes.
With installment arrangements, you can minimise the amount of penalties and interest that you pay on your outstanding balance. The sooner you start the installment arrangement, the better. This way you can eliminate the need to pay penalties and minimise the interest expenses. Note that penalties are not tax-deductible, but interest expenses are!
Tax saving tips #3: Consider tax-pooling if you’re overdue (and in NZ)
Well, you’ll want to talk to your accountant about this! Tax-pooling is a system where third-party financiers loan you money to pay your overdue taxes. We typically recommend tax-pooling services for clients that are overdue on their tax debts. Here’s how it works.
You had $10,000 owing that was due on 7 May 2024. However, due to poor cash flow, you could not come up with the money by the due date. It now is October 2024 and the penalties and interest expenses are mounting. A tax pooling agency essentially has taxes that they have ‘prepaid’ with the NZ IRD. You can then ‘purchase’ these prepaid taxes and have them apply retroactively to the 7 May period.
This means that the tax gets paid effectively on the due date. Which means that your penalties automatically disappear. All IRD interest on your debt also disappears! Yay! However, there is a price to pay – you will then need to pay back the tax pooling agency. If you pay via lump sum, the interest rates for tax pooling agencies tend to be lower than the IRD. However if you opt for an installment arrangement, the interest rates can be a lot higher than the IRD (especially for longer periods). But at least you don’t have to pay penalties.
You definitely want to talk to an accountant before going with tax pooling. Consider your situation carefully. Tax pooling isn’t a magic bullet that will make your tax problems go away.
Stay on top of taxes, stay in business!
The number one indicator of cash flow issues in a business is the inability to pay taxes on time. So think of taxes as a litmus test for your business’ health. If you can pay taxes on time, all the time, you have fewer issues to worry about. Once you’ve built up the discipline to pay taxes on time, it becomes easier to manage other financial aspects of your business.
Furthermore, getting financing will be easy without tax debts hanging over your head. Its important to note that the tax authorities are happy to liquidate your company if you’ve accumulated too much tax debt. One way or another, the tax man cometh, and the tax man taketh! But if you’re on top of taxes, you don’t need to worry about that!
Stay positive!