Kiwi bird sitting down looking worried thinking about topics such as, Tax Audits, Interest Deductibility, Higher Interest and so forth.

NZ Small Business Tax Tips 2024

(NZ small business tax tips 2024 – 5 minute read)

Kia ora again Aotearoa!

The financial year is coming up soon! As we come into the new financial year of FY2025 (which starts on 1 April 2024), let’s take a look at some tax related issues that will affect NZ small businesses in the new financial year.

Interest deductibility on residential rentals are not back just yet…

Part of the current government’s election promises was to get interest deductibility on residential rentals back. This means that residential rental owners can claim back interest deductions paid on their mortgage as a tax deduction. This would apply to ALL types of residential property.

Currently full interest deductibility is only reserved for certain types of residences (social housing, new builds, etc..). Other residential rentals are only allowed to deduct up to 60% of their interest (as of FY2024) as a tax deduction. If you bought your property after 27 March 2021, no interest is deductible at all.

The promise was that interest deductibility would be back… and they will be…just not yet. This coming FY, the official plan is to bump interest deductibility back up to 80% and then in FY2026 (1 April 2025 to 31 March 2026), it will go back to 100%. A much needed relief for landlords – but not so much for those who rent.

Small business tax tip:

If you don’t have residential rental investments, this does not affect you. If you are a residential rental investor – tax tips from the previous year still apply. Consider diversifying your investment portfolio. Move into commercial rental (which are exempt from many of the laws affecting residential rentals) or buy up stocks. If your rental properties are draining your finances (especially since interest isn’t fully tax deductible) consider selling off the property and paying off the mortgage.

The IRD is back, baby!

Well, the IRD never went anywhere. Its just that over the past 3 years they’ve been dealing with COVID related stuff. Like Resurgence Support Payments, Wage Subsidies and tax relief. This put a strain on their resources to deal with usual IRD stuff – like audits and chasing up tax returns.

This basically means that IRD has freed up resources to do what IRD does best. Which is ensuring that everyone pays their fair amount of taxes. You can expect more calls from the IRD after you’ve submitted your returns. If you’ve been slack on filing your tax returns, you’ll likely get a call from them too.

You shouldn’t be fearful of the IRD. They’re really nice people. And I’m not just saying that because I’m a tax agent! Here are some tips to stay in the IRD’s good books:

Small business tax tip:

Keep a record of all your large purchases

If the IRD calls you – make sure you have receipts/invoices for any large purchases you have made. They’re not going to waste their time asking about the $5 coffee you had with your client. They will more likely query you on that $20,000 vehicle purchase that you just put through your recent GST return.

How large is large? At our firm we consider any asset purchase over $1,000 as ‘large’ for small businesses. Also, exercise some judgment depending on the transaction that you are trying to claim as a deduction. If you’re claiming $1,000 as an entertainment deduction – you should keep a record of it to prove you actually DID spend $1,000 at a fancy restaurant for a client dinner.

Get your filing right the first time!

One of the biggest reasons we get a call up from the IRD is if a client has filed a prior year return incorrectly. The IRD has a record of all your prior year tax returns. This means that if this year’s tax returns is missing an income source or has deductions you’ve never claimed for in years prior – you may get called up by the IRD.

One way to avoid this is to voluntarily disclose any changes to your income tax with IRD. After filing, simply send them a message (via MyIR web message) telling them what has changed for you in this tax year. For example, you’re no longer a shareholder of your company – so you won’t be receiving shareholder salary this year. You should let IRD know that. Then you are less likely to get queried on why you didn’t declare shareholder salary this year.

Consistency and accuracy is what is most important here! If filing correctly gives you anxiety, then you should talk to an accountant.

If in doubt, just ask

The MyIR web messages are a handy tool! Anyone can use them to communicate with the IRD. Remember, if you are ever unsure if you are doing the right thing tax wise, feel free to send them a web message. That being said, it can take up to 15 working days for them to respond.

If you’re looking for more personalised advice, feel free to reach out to our team – we’re more than happy to organise free 15 minutes worth of tax advice.

Higher use of money interest on tax

So, remember how we’re in the middle of a high-interest rate regime? Yeah, so that’s affecting the interest charged by the IRD on outstanding amounts with them.

If you are late in making payment to the IRD, you will be charged a late payment penalty and interest charges. The longer you take to pay off the balance, the more the interest will accrue. Currently, as of today, the interest rate sits at 10.91%. Three years ago in 2020 it was sitting at 7.00%. The good news is that you’ll now earn 4.67% on any overpayments to the IRD. Back in 2020 you’d earn a sweet 0% on that amount. To be fair, you can still get better interest rates from savings accounts in banks.

This means that if you are on an instalment arrangement with the IRD for your tax balances – it may take you longer to pay that debt off as a higher portion will be going towards paying your interest. Don’t worry though, if you are on an instalment plan, you’ll still exempt from late payment penalties.

Small business tax tip:

Easy. Just pay on time.

Ok, so maybe its not that simple. Payment systems can sometimes mess up and IRD may even receive the payments a day late. The best way to avoid this is to make your payments well before the due date. Then you should check everyday to see that the payment has been applied to your balance. If its not happening within 3 days – get in touch with the IRD and tell them your issue.

If you have an instalment arrangement – try to see if you can lump sum pay some principal. That should help you reduce your interest liability in the long run. If your outstanding balance is related to provisional income tax, you should talk to your accountant about using tax pooling services. With tax pooling, you can save in interest payments made to the IRD by borrowing money from a tax pooler to pay your IRD debt. Naturally you have to pay the tax pooler back, with interest (which should be lower than the IRD).

If all else fails and you still have to pay interest to the IRD, there is still a silver lining. Interest payments to the IRD are tax-deductible (yay?).

Stay tax ready with these small business tax tips!

Taxes are part of running a small business. If you’re paying taxes, that’s usually a good sign that your business is making money. Remember that you can always reach out to our team if you need help with taxes.

We’re here for you!

Stay positive!

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