Understanding Tax Compliance
Paying tax is a fact of life for anyone earning a living - businesses included. It’s important to review your tax situation regularly to ensure you’re compliant across all types of business tax such as PAYE, GST, income tax, and anything else that needs to be paid to the Inland Revenue Department (IRD).
In a fast-paced business, it can be a real struggle to maintain regular financials and accounting activities, as essential as it is to do so. That’s why many business owners opt to employ or contract accounts people or engage an accountant to help manage tax compliance throughout the financial year for their business.
In this article, we’re going to talk about some of the aspects of tax compliance that you should be aware of, although it’s not a complete guide nor specific to any one business. This can be a complex area of business, so we’d highly recommend getting in touch with us to discuss your individual requirements in more detail.
PAYE - Pay As You Earn
If you hire employees through a full or part-time arrangement, chances are you’ll be paying them through IRD’s PAYE scheme. This means that the employees' tax on their wage income is deducted by you as the employer and paid across to the IRD on their behalf. This is done when you process the pay run each week, fortnight, or month. The funds that employees physically receive in their bank account are their gross wages, less the tax portion. Pay as you earn is a really convenient way to pay tax for employees because they don’t have to think about it - they just need to make sure they’re on the right tax code and their employer’s payroll should take care of the rest.
As the employer, you need to make sure that tax deductions through PAYE are being processed correctly during the pay run (most decent accounting software designed for New Zealand will help you do this more efficiently).
Employee deductions need to be filed to the IRD - known as payday filing. Put simply, each time you process a pay run you need to report this to the IRD - this helps to ensure that records are kept up to date and deductions are correct. It may feel like more admin (and it is) but this stringent filing requirement does reduce the likelihood of big, complicated issues down the track for both you and the employee.
The other side to PAYE is making sure you pay these deductions onto the IRD at the right times. It’s worth checking these requirements with IRD as they do sometimes update the way in which this will be done. Usually, if your total pay run is under a certain amount (as of September 2022 $500,000 per annum), it is by the 20th of the following month, otherwise larger pay runs will need to have PAYE deductions paid across more frequently. Employers can decide to pay more regularly which might be preferred to avoid making big one-off payments. Some of our clients like to line up their PAYE deductions with their pay run. Chat with our team to learn more about PAYE payment frequencies.
Business income tax
All businesses, whether they’re a limited liability company, partnership, or self-employed operation will be required to pay tax on income (net of expenses) that the business earns. This is why keeping accurate records of the business's financial transactions is critical for tax calculations and payments. Incorrect accounts could mean you overpay tax or worse underpay and get penalised for doing so.
Self-employed business income tax
If you’re working as a self-employed business, it’s quite simple; you pay tax per the individual tax rates, as if you were an employee, entirely based upon the annual income level. New Zealand’s individual income tax levels are progressive, meaning that there are different percentages of tax deduction for the various tiers of income.
From 1 April 2021, the individual income tax rates are:
|Annual Income||Income Tax Rate|
|$14,000 or less||10.5%|
|$14,001 - $48,000||17.5%|
|$48,001 - $70,000||30%|
|$70,001 - $180,000||33%|
What you’ll want to stay conscious of is your income throughout the year - if your income increases and you move into the next tax bracket(s), you’ll want to ensure you’re putting aside the additional percentage of income. Over time, with more intel around your forecasting and income, you may start to establish a flat amount to put aside from each invoice that more than covers your income tax. Regardless, having good record keeping for your financials that provides year-to-date earnings, can help ensure you’re staying ahead of these required percentage deductions.
If you’re in your first year of business and it ends in a profit position, you’ll have final (terminal) tax to pay for the financial year and, depending on the level of income, you may also fall into the provisional tax regime for the financial year ahead.
To find out more about provisional tax please read our article – Provisional Tax and Tax Management.
Limited liability companies' business income tax
If you’ve registered as a company (e.g. with the Companies Office, have directors, shareholders, etc), then the business will need to pay income tax on its profits. This tax rate is flat, meaning all income is taxed at the same percentage. As of 2022, this rate was 28%, but we would recommend you check with the IRD for the most up-to-date rates.
In your first year of business if the Company makes a profit, there will be income tax to pay for the past financial year, and depending on profit levels, potentially provisional tax for the following year as well.
Provisional tax is like an estimate or provision for income tax on profits and will be payable in various instalments throughout the year, kind of like PAYE for Companies, but due in 2 or 3 instalments. While this might seem like you are getting charged twice, you are not - provisional tax comes off that year’s final tax amount. If your income fluctuates, final and provisional tax can feel a bit lumpy. This is why it’s useful to have a tax agent/accountant on board as they can help you manage payment dates and adjust provisional tax estimates if there’s a definite drop for that financial year.
Expenses - don’t skip over your business costs
You’re well within your obligations to deduct any legitimate business expenses from your business income that have been incurred during the financial year. While it is not uncommon for businesses to post a loss in their first year, especially if there are initial costs to get things up and running, the goal is obviously to generate a healthy profit.
Expenses can come in many forms, but whatever these are, they need to be recorded within your financial/accounting system as you go, otherwise, they may be missed or take a long time to reconcile later down the track. Common expenses include:
- Minor assets (assets under $1,000)
- Office expenses
- Transport costs
- Software subscriptions
Having a good accountant is really beneficial when it comes to end-of-year tax calculations as they’ll guide you through claiming the necessary expenses.
GST - Goods and Services Tax
As of 2022, any business that receives more than $60,000 of revenue a year needs to register for and charge goods and services tax (GST). GST is separate from income tax, it is a 15% surcharge on top of your standard pricing. This is paid by your customers, and then you directly pay this on to the IRD when your GST returns are calculated/filed.
Reducing your GST payment is a matter of going through your business expenses that have had GST charged when you paid them, this should be shown on invoices or receipts. Your accounting platform should capture this GST component and allow you to run reports specifically on this tax type.
Offsetting these expenses isn’t just beneficial to your business, it is required to ensure that the same goods or services aren’t being taxed for GST twice - once by the seller and once by the buyer. It should only be paid once. GST Returns are required to be filed/paid to IRD at intervals you can set - commonly twice a year, although this can be done 6-monthly or more frequently and be filed monthly.
There are some conditions around which filing frequency should be used, so for more information on GST please get in touch with us or read our article – Everything business owners need to know about GST.
The standard tax year ends on the 31st of March and starts on the 1st of April. However, some industries and businesses have a non-standard balance date. For example, 30 June is one of the more common non-standard balance dates. This will have some impact on when you file and pay tax.
Paying your tax
If you are personally filing directly to IRD for yourself or on behalf of your business entity, then you will be subject to certain dates for filing and payment. If you work with a tax agent that’s authorised to manage your accounts and tax, then you may get the extended filing timeframe or an extension of time (EOT) arrangement. This is a way for tax agents to manage their clients across the year instead of processing everyone at the same time (that would be really hard to do, trust us!). Learn more about extended timeframes here.
Paying your tax to IRD can be done in a number of ways, including internet banking. Many banks have pre-set IRD payment settings that guide you through details like IRD number, tax type, tax year, etc. You can also pay with your credit or debit card online through IRD.
Other deductions that you’ll need to think about with IRD
IRD is also responsible for collecting KiwiSaver from employees and forwarding this on to their nominated KiwiSaver fund, of which there are many. KiwiSaver contributions are made between the employee and employer, with a minimum of 3% contribution made. The employment agreement and KiwiSaver forms can set a higher contribution amount than the employee will make if they wish.
Another deduction that will come out of the PAYE is the ACC earners’ levy. This is a flat rate that all employees pay for out-of-work accident cover. This is separate from the ACC invoices businesses will pay to cover employees and themselves (there are different ways of invoicing a limited company versus self-employed). ACC bills these invoices directly and they’re based on the business activity and earnings. These are referred to as levies which cover work accidents and are not optional.
For wage-earners, student loan repayments will be denoted through the tax code of the employee and paid via their wages in the PAYE returns. Provided the employee has selected the correct tax code that will include student loan repayments, PAYE deductions will include these at the correct student loan deduction rates.
The above information is general and does not represent tailored advice for your business. For more specific guidance, get in touch with our team who can connect you with one of our accountants. For official tax advice from the Inland Revenue Department, get in touch with them directly or visit their website.
Read our other Accounting guides
We’ve all heard of GST, (short for “Goods and Services Tax”) as we’ve had to pay it! It’s that annoying tax that makes goods and services more expensive right?
But what about if you are the person selling the goods or service? GST from this angle is far less understood and can be far more complicated.
In this blog, we are going to dive into all things GST answering all those nitty-gritty questions, including, when you should register for GST, the rules around filing your returns, and which accounting basis could be right for you...
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