Tax!
I wouldn’t be much of an accountant if I did not talk about
Tax!
Now, regardless of how you feel about tax, you still have to pay it. Even if you don’t have any cash in your bank account, you still have to pay taxes (assuming you made a profit).
This week’s article will provide a general overview of tax in NZ (for all my fellow denizens of Aotearoa). This article will not teach you any fancy new tricks to avoid tax (because that’s illegal) but it cover your tax obligations in general.
So if you’ve made it this far without throwing up in disgust at the mere mention of tax, good on you! You are on your way to greatness and financial success!
PAYE Tax
PAYE tax is the first type of tax we will talk about. PAYE stands for Pay-As-You-Earn, and no, its not the sound that the tax collectors when they come around to collect taxes from you. PAYE its the most common form of tax all of us will be paying. It is the tax that is collected from our salary before it is paid to us.
So let’s say for example I get a Gross Salary of $2,200 this month. Out of that amount, about $400 will be use to pay for taxes. This represents my PAYE tax portion. Other deductions made from my Gross pay can include Kiwisaver contributions, Student Loan deductions and any other deductions that my employer wants to make (like a social club deduction). By the end of the day, I will only get to take home about $1,500 of my Gross Salary. PAYE tax is easy, mainly because your employer does it for you. At the end of the tax year (31 March – EVERY YEAR) the IRD will determine whether you need to pay more tax or if you have overpaid tax (more often than not you will have a refund waiting for you – so make sure you update your details on the IRD website with your bank account details so you can cash out some sweet sweet $$$).
If you are an employer though…. P-A-Y-E is an absolute P-A-I-N. Basically you need to calculate the PAYE on each employee you haveEach time you pay an employee, you need to withhold the PAYE amount (and other deductions mentioned above) and pay it to the IRD by the 20th of each month (and the 5th if you are paying combined salaries of more than $500,000 a year). Manually filing PAYE is an absolute pain. My professional recommendation is to get a payroll software to do it for you. I have a personal preference for Thankyou payroll as they are easy to use and free for up to 3 employees. It’s not terribly advanced though – but it will get the job done and you won’t have to worry about filing PAYE for your employees yourself!
GST
GST, in a nutshell is tax that you collect on behalf of the government. So when you sell a product or service and charge 15% GST on it – that 15% GST does not belong to you. It belongs to the government! You only pay GST if you are GST registered. You can voluntarily register for GST as a small business. If your annual sales is $60,000 or more, you must register for GST as IT IS THE LAW.
GST is paid every 6 monthly, 2 monthly or 1 monthly period. Basically the larger your business is, the more frequently you pay your GST. The cool thing about GST is that, when you purchase goods that have GST on it, you can use the GST paid on those goods to offset the GST you have collected through your sales. This means that if you have spent more money on GST than you have collecting it through sales, you can get a refund from the IRD – yay! But typically when this happens – it means that you are spending more money than you are making – which isn’t always a good thing.
But that being said, if you are starting a brand new company and expect to be incurring some heavy set-up costs in the first few months – I highly recommend getting GST registered even if you are not making $60,000 worth of sales a year. This is because whatever costs spent setting up will incur GST paid and eventually you can get refunded all this GST in the initial stage.
GST can be on a cash, accrual (invoice) or hybrid basis. I won’t go into too much detail about the difference between these basis as practically speaking, they won’t make that much of a difference in how much GST you have to pay – but rather they affect the timing of transactions included in your GST payments.
Income Tax
If you are a small business owner or have a side hustle which makes you some extra $$$ on the side – this is what you will be preparing at the end of every tax year (31 March every year guyssss!!!).
IR3 forms are what you fill out as an individual – if you are just filling this out online, you only need to put in the net profit that you have received from your side business activities. Any shareholder salary you received from a company that you own is listed here as well. Its a pretty simple form to fill out and like most things these days you can do it online. If you are running a small side hustle and making less than $50,000 a year from it, there’s no need to pay an accountant to file your tax returns, save some money and just do it yourself!
IR 7 forms is what partnerships fill in. It basically contains the net taxable income of the partnership and then splits it accordingly between the two partners who will have that split income show up in their personal IR 3.
IR4 forms is what companies have to fill out. Think of it as an IR3 form – but for companies. Generally speaking, you only need to list down business income (after expenses), interest income, dividend income, other income and any non-taxable adjustments (like penalties etc). Filling out an IR4 is more complicated than filling out an IR3 for yourself. You can, in theory, do this yourself, but the larger your company grows, the harder it will be for you to do on your own (which is why you need accountants!).
If you or your company had more than $2,500 of tax payable during the financial year, you will have to pay what is known as provisional tax. Provisional tax is calculated as your current year tax payable multiplied by 1.05 (a 5% uplift) and is spread in up to four instalments throughout the following year. The dates you have to pay provisional tax differs based on your financial year end but if you have a 31 March year end, the dates typically fall in August,
November, January with the final payment (or refund) being due in April next year. What I have just explained here is the standard provisional tax option. There are other options like the Accounting Income Method, Estimation method and Ratio method – which I won’t get into too much detail simply because they don’t usually apply to your average business owner. If you need more information on the different methods, check out the IRD’s website here.