There are only two certainties in life.
Death and taxes.
While those of the living will never be able to understand the mysteries of death, we can still try our best to make sense of taxes.
Throughout my years of practice and talking to friends and family, I notice that many people have the wrong idea about taxes. So in today’s article I am going to write about taxes in a very general manner so that you, dear reader, can understand what many of us accountants take for granted.
I present to you: TAXES EXPLAINED
So first off, let’s start with the question:
What are taxes?
A tax is a levy on your income as an individual living under the service and protection of your local authority/government. Basically – If you live in a certain area and benefit from the public services provided by the local government (IE roads, schools, hospitals, etc.) then you should be paying taxes.
Taxes are collected from every tax resident of your country (remember that a Tax Resident is NOT the same as being a permanent resident/citizen – check with your local tax body to find out what constitutes tax residency). Taxes are then used by the government to pay for public amenities and services.
How are my taxes calculated?
Taxes are always calculated based on your income that you have received – either from working for an employer or earning profits from your business. The more money you make, the more taxes you have to pay. So having a huge tax bill at the end of the period almost always means that you are making lots and lots of money! Yay!
Seriously, having lots of tax to pay is NOT a bad thing – it shows that you are doing quite well in life.
Me, telling you that taxes aren’t bad
It is worth noting that you may be able to claim certain deductions or allowances from your government when it comes to determining your taxable income. Malaysia (where I grew up) is quite generous in this respect, allowing you to claim deductions on a lot of things from your personal living expenses to your parent’s medical expenses. You can claim these deductions regardless if you are a business owner or an employee.
In NZ (where I live now) you can only claim on certain types of expenses (if you are not running a business), such as personal income protection insurance and fees paid to an accountant (NZ does like to pride itself on the relative simplicity of their taxes as compared to other countries).
If you live in tax-free countries (like Oman for example) – you don’t even have to worry about paying taxes – everything you earn is 100% yours!
How do I pay taxes?
In most countries around the world, if you are working as an employee, getting paid a regular salary, your tax will be deducted from your gross salary. This means that your employer pays taxes for you on your behalf and whatever amount gets paid into your bank account already has had taxes deducted from it.
If you are a business owner, you will be required to figure out how much profit you have made during the year, which helps determine your taxable income and how much taxes you have to pay.
If you have been following this blog, you will know that:
Generally speaking, you can claim any and all expenses that relate to running your business (this includes: staff wages, rent, marketing expenses, cost of materials, and so on). There may be some slight differences from country to country – but generally it should be the same.
Your taxes are calculated as a % of your profit and that is the amount that you pay to your tax authorities.
Personal vs Company tax rates
Most countries will have a different rate for personal taxes and company taxes.
Countries like Malaysia, Singapore, NZ and Australia all tax their individuals using a scale rate – meaning that the more money you earn , the higher your tax percentage will be on all income above a certain threshold.
At the lowest threshold, you will be paying a very small percentage of tax and at the highest threshold, you will be paying a larger percentage of tax. For example, the NZ tax rates for individuals looks like this:
This means that you pay 10.5% tax on any income up to $14,000. Any income earned above $14,000 to $48,000 is taxed at 17.5% and so on. It is important to note that in any scale rate system, your income will always be taxed at the appropriate rate, based on its threshold. Meaning that even if you are making $80,000 a year in NZ, only the $10,000 above the $70,000 threshold will be taxed at 33% NOT your entire income of $80,000.
Companies in general are taxed at a flat rate. In NZ this flat rate is 28%. In Malaysia it is 24%. Companies do not benefit from a scale rate of taxes and in general pay more taxes than an average individual would. If you are a high income individual though, you may end up paying proportionately more taxes than a company.
Do I need an accountant to help me with my taxes?
In most cases, no. Especially if you are an employee and you have your taxes deducted for you from your employer. That being said – an accountant can help you claim the necessary deductions to help reduce your tax payable, however, the cost of hiring an accountant to do so may outweigh the benefits received from your tax deductions. Ultimately, this is something you can do on your own.
If you are a small business owner or self-employed- it depends on how complex your business is. Generally speaking, if you are very clear about what your income and expenses are – you can easily file your own taxes. If you have difficulty with this, then you should engage the services of an accountant who can help simplify the process for you.
If you are a large business owner – why are you even reading this blog? You would already have a dedicated team of accountants helping you with tax and management issues.
Taxes are an important part of life and cannot be avoided (because it is criminal to do so). Remember that any income you earn should be declared to the tax authorities as you may need to pay taxes on it.
If you are based in NZ and need some help with tax issues – book a FREE 40 minute consultation with me and I’ll see if I can point you in the right direction. Send me an email at sam@samharith.com and I’ll do my best to help you out :).
Stay positive.