Here is an update to the self employed tax filing guide!
At this point, I’m sure many of you self-employed sole traders would have received notifications from the NZ IRD to PAY YOUR TAXES (before 7 July 2021). Fortunately, I have written this simple guide on how you can do it easily (and cheaply) by yourself. But that guide was written last year. There are two slight changes to the MyIR system now:
Change #1: Wages subsidy for self employed tax
Under the ‘income’ step of your tax filing process, you will find a new window in which you can declare the amount of wage subsidy that you, as an individual, received. This is usually filled out automatically by IRD since they have your records. However, this pre-filled amount is only based on their existing records:
If you had a repayment arrangement with Work and Income (say, a voluntary repayment or they’ve ordered you to pay back) this may not be reflected in IRD’s records. You should change the amount in the Government Subsidies box to reflect the actual amount you received MINUS any amount to be paid back.
Also, if you are a shareholder-director of a company, chances are you applied for the wage subsidy through your company. Hence this box may not pre-populate for you. You will need to declare all government subsidies that you received as an individual in this box.
Please note that the wage subsidy is NOT business income. This means that you cannot deduct business expenses against the wage subsidy, regardless if you operate as a company or sole trader.
Change #2: Claiming other expenses for self employed tax
IRD NZ has a short list of deductions that they will allow you to claim. These deductions apply to ALL income earners (even those on PAYE salaries). These are limited to:
Fees paid to your tax preparer
These are fees that you pay to your accountant, book-keeper or part-time accounting university student who needs some cash to file your taxes.
Note that if you have already claimed these fees as part of your sole-trading business expenses you CANNOT claim it again! Be reasonable!
Premiums on loss of income insurance
If you have income protection or living expenses cover – these are insurance payouts which are taxable. Because of this, any premium you pay on said insurance is 100% tax deductible. Best to keep track of this as those premiums can add up to quite a bit!
Interest paid to IRD
This only applies if you have been late with your repayments to IRD. When you are late, you get charge UOMI (Use of Money Interest). When that happens you will get a letter summarising your interest and penalties. Interest is claimable, penalties are not. It is important to make that distinction.
Interest on money borrowed for investments
This relates to any borrowings made to buy shares/other taxable investment income. If you borrowed $100,000 to invest in a PIE fund, you would be able to claim interest expense on that $100,000 since the income you receive from the PIE fund is taxable. That being said, I personally don’t recommend borrowing money to invest.
Interest on your first home loan is not considered an investment, unfortunately. You can still claim a portion of the interest for business purposes via the home office claim. If you have investment properties, remember that interest expense deductibility will be phased out starting in September 2021.
That’s about it! All the best in filing your personal tax returns and as always:
Stay positive!
P.S: I will be going on Honeymoon from 9 July 2021 to 20 July 2021! I’ll see you again when I’m back!