Understanding tax

For small business in New Zealand

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Contents Getting started with small business tax 3

What you need to know about business income tax 4

Income tax during your first year in business as a sole trader 5

Understanding provisional tax 6

Claiming business expenses 7

Depreciation of business assets 9

Polishing up your knowledge of GST 10

An introduction to fringe benefits tax 12

Ready to employ staff? 14

Employer Superannuation Contribution Tax 16

Record keeping and reporting 17

Essential compliance checklist 18

MYOB Backs Kiwi businesses 20

The information provided within this document is of a general nature and is intended to be a guide only, in accordance with our Legal Disclaimer. For specific advice regarding your particular circumstances, please consult your tax agent or the Inland Revenue Department as appropriate.

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Congratulations on starting your small business!

Now is as good a time as any to find out what your small business tax obligations are. Or maybe you just need a quick refresher.

Here at MYOB, our key driver as a business is to make business life easier. We want to help you worry less about that 3 letter word – TAX – so we’ve put together this eBook to help you learn how to manage your small business tax.

You’ll find heaps of valuable information on things like claiming business expenses, employing staff and how to calculate GST.By understanding what problems your customers are experiencing, the better you’ll be able to understand and deliver to their requirements using your solutions. Your customers will love you for it.

How can MYOB help you to be compliant?

We make accounting software for small businesses in Australia and New Zealand, including some pretty nifty cloud-based ones, which you can read about at the end of this eBook.

But we haven’t just focused on telling you how to be compliant using our products. This eBook is a great guide for any small business wanting to stay compliant with the Inland Revenue Department (IRD).

Okay, let’s get started!

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If you’ve set your business up as a sole trader, you would use your personal IRD number, but if you’re in a partnership or limited company, then you would need to set up a separate IRD number.

Feeling overwhelmed about how to set your business up for tax purposes? Well, you’ve probably done most of the hard work already!

By now, you would have already decided whether you’re going to run your small business as a sole trader, partnership or a limited company. And you’ve most likely registered your business name with Inland Revenue, and received your IRD number.

Getting started with small business tax

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You can claim your business expenses against your business income to arrive at your net profit.

Your first year in business is not tax-free. This means that if you make a profit in your first year, you have to pay tax on this. You can make voluntary tax payments during your first year of business, which helps to spread the cashflow.

If you have not been making tax payments during your first year in business, the tax will need to be paid by 7 February in the following year if you have a 31 March balance date (or, if you have an accountant, by 7 April).

How the net income of your business is taxed depends partly on your choice of business structure – sole trader, partnership or limited company.

When you’re in business, you need to pay income tax on your net profit earned for the tax year.

Your business receives business income for the goods and services it sells.

What you need to know about business income tax

Income tax during your first year in business as a sole trader

NET PROFIT = Income Earned for the year – Business Expenses for the year

As a sole trader, you as the individual and your business are almost the same when it comes to tax and legal obligations.

This is because unlimited liability businesses like yours aren’t considered separate legal entities from those who operate them. So if you run or are a partner in an unlimited liability business, you pay tax on your net profit, or your share of it, at standard individual tax rates.

Find out more about sole traders, partnerships and limited companies.

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After your first year in business you may be required to pay income tax in three instalments during the year. This is called provisional tax.

Many small business owners think provisional tax is a separate tax on its own, but it’s simply a way of paying your income tax as it’s earned during the financial year, in instalments, and then paying any outstanding sums at the end of the financial year.

Understanding provisional tax Thoroughly budget for your first few years’ tax obligations to relieve the stress of cashflow financial burdens. The Inland Revenue Tool for business can help you manage your income tax obligations.

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Claiming business expenses

Here is an example for you:Are you a small business owner working from home?Did you know you can claim business expenses on reasonable household resources you use to conduct business?

The portion you can claim depends on the percentage of your home’s entire floor space used for your business.

Percentage of household costs claimed

15%

Household resources may include:

power, insurance, council rates, mortgage interest

Business floor space

Storage in garage plus office study

15 square metres

Total floor space

100 square metres

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1Claiming interest on mortgage payments rather than the principal payments.

2Claiming the correct portion of line rental costs and toll calls when claiming home telephone costs.

3Using a fair and reasonable method to calculate the business proportion of Internet usage.

There are various considerations you need to makewhen calculating expenses for your home business

To find out more about claiming business expenses, visit the Inland Revenue website.

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Depreciation of business assets

It’s no longer possible to claim depreciation on your home. However, you can still claim depreciation on other assets you use in your business, such as your computer or phone.When you either sell the home or stop using it for business purposes, you need to make an adjustment in your end of year tax return for any depreciation you’ve claimed in previous years. This is to account for gains (declared as gross income) or losses (declared as an allowable deduction).

Find out more about accounting for depreciation with Inland Revenue.

The Goods & Services Tax (GST) is a form of value-added tax loaded on to the price of goods and services. At the moment, it’s set at 15% of the price of the product or service.

Businesses must become registered for GST once they reach (or expect to reach in the next 12 months) an annual turnover of more than $60,000. As a GST-registered business, you collect GST on behalf of the Government by building it into the prices of your products and services, and then you claim GST back on the products or services you’ve bought as business expenses.

Polishing up your knowledge of GST

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An IRD number

A BIC (business industry classification) code

A chosen taxable period+ Once a month + Once every 2 months + Once every 6 months

A chosen accounting basis:Payment basis, where a GST transaction is considered to occur when payment is made or received.

Invoice basis, when an invoice is received or issued, or when you receive or make a payment.

Hybrid basis, a hybrid of the first two and is designed for exporting businesses that can’t charge GST on what they sell overseas.

The basic principle of GST is you end up paying Inland Revenue the difference between the GST you collected on what you sold and the GST you paid on the supplies you bought for your business by filing regular GST returns with Inland Revenue throughout the year.

Your GST returns will show that you either have GST to pay or you will be receiving a GST refund.

To register for GST, head to myIR secure online services. Find out more with an Introduction to GST and GST obligations. But before you register, you need to have these 4 things organised.

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Small businesses operating as sole traders often use the purchase of their vehicles as a portion of GST. You can claim back GST on the business portion of maintenance costs, including repairs and registrations. And using your vehicle on weekends provides fringe benefits that attract GST as well as Fringe Benefits Tax (FBT).

Find out more with an Introduction to GST and GST obligations.

Calculating GST can be tricky. Before you submityour GST return, you need to calculate the GST components. You can do this by either including or excluding GST:

1 Including GST Simply add 15% to the price: $100 (GST excl.) + 15% (of $100) = $115

2 Excluding GST Multiply the price three times and divide by 23: $115 (GST incl.) × 3 ÷ 23 = $15 is the GST portion and $100 is the non-GST portion

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An introduction to fringe benefit tax

Providing benefits can be a great way to recognise and reward your employees’ contribution to your business, but you should remember that some benefits or perks are subject to a fringe benefits tax (FBT).

FBT applies to non-salary or wage benefits you give to your employees, such as use of a company car or a discount on a product. These types of benefits are simply considered “cash in another form,” which is why they are separately taxed.

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Single ratePay FBT at a single rate of 49.25% on all benefits you provide.

Alternate rate calculation processAlternate rate allows for fringe benefits to be taxed at their marginal tax rate. This process ensures that fringe benefits of employees earning less than $70,000 are not over-taxed, as they may be under the single-rate option.

Short form alternate rate calculations:Find out here about the use of the short-form alternate rate calculation option for FBT if you are an employer.

Find out more about fringe benefits tax.

Fringe benefits includes:

+ The private use of a motor vehicle

+ Low interest loans

+ Free or discounted goods and services

+ Subsidised transport

+ Contributions to sick, accident or death benefit funds, or to insurance

+ Other benefits if the cost is above certain thresholds.

You can calculate FBT using any of these 3 methods:

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When you start employing staff, you must register as an employer with Inland Revenue. You’ll also be asked whether you need to register for the Employer Superannuation Contribution Tax (ESCT).

However, you don’t need to register as an employer if you only hire contractors.

All businesses with employees need to pay an annual levy to the Accident Compensation Corporation (ACC) to cover workplace injuries.

How much you pay depends on:

Ready to employ staff?

1 The type of industry you operate, as some industries carry more risk for workplace injury than others.

2 How much you pay your employees in wages.

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The ACC sends you an invoice at the end of your first year, calculated on the wages recorded with Inland Revenue in your employer monthly schedules, and the business industry description code you chose when you registered for GST.

You will also receive an invoice for the next year’s cover, as ACC Workplace Cover is normally paid in advance.

Even if you don’t hire employees, you will need to pay a levy once a year for the ACC to cover your personal risk of accidents and injury at work.

Find out more about the ACC, or visit the MYOB Employer Resource Centre, your single location for all your employment needs. At MYOB, we understand there are so many questions facing small business owners about employing staff. So we have created a range of guides, action plans, quizzes and videos to help you understand the rules and regulations related to having employees in a small business (SMEs).

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For more information on choosing the right ESCT rate for your employee’s salary or wages or employer responsibilities, visit the IRD website.

The Employer Superannuation Contribution Tax (ESCT) is paid by employers who make a contribution to an employee’s superannuation scheme.

As an employer, you must now deduct tax from the contributions you make to your employees’ KiwiSaver schemes.

KiwiSaver is a workplace superannuation scheme that helps your employees save for their futures by investing money in one of a number of approved private investment schemes.

Employer Superannuation Contribution Tax

$0 to $16,800 10.5%

$16,801 to $57,600 17.5%

$57,601 to $84,000 30%

$84,001 upwards 33%

Employee salary/wage income rate for year ended 31 March ESCT

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As a business owner, you’re required by law to keep accurate tax records. You also need to be able to calculate your income and expenses.

If you don’t have enough records to do this, then you’re not meeting your tax obligations and could face penalties. You must keep tax records for a minimum of seven years, and these can include:

+ Cashbook, journals and ledgers

+ Invoices and receipts, issued and received

+ Bank statements and deposit slips

+ Worksheets showing tax return calculations

+ Any other necessary documents to confirm accounting entries.

Record keeping and reporting

If you find an error in your records, you can write to Inland Revenue asking to have it corrected – if you make a voluntary disclosure then you can reduce the risk of being prosecuted and fined. However, if Inland Revenue find inaccuracies in your accounts, you could be audited and subsequently face penalties.

Avoid the risk of being prosecuted or fined, and get your books in shape by using online accounting software.

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Essential compliancechecklist

1Confirm your business structure, e.g. sole trader, partnership, company.

2Register your business for GST and ensure you have an IRD number, a BIC number, a chosen accounting basis, and a chosen taxable period.

3Your income tax will need to be paid by 7 February in the following year if you have a 31 March balance date (or, if you have an accountant, by 7 April).

4Budget your finances for provisional tax.

5Confirm what you can claim as business expenses.

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6Have a clear understanding of what assets you can depreciate.

7Identify your fringe benefits and work out your best method for calculating FBT.

8Prepare to employ staff and ensure you understand your obligations as an employer by visiting the MYOB Employer Resource Centre.

9Keep your records accurate and readily available – we recommend using MYOB online accounting software.

10Seek further support with the IRD or a tax agent such as an MYOB Approved Partner.

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We also support businesses with a range of initiatives including:

+ Working on your behalf with the Government and making you aware whenever there are changes affecting your business via the MYOB Business Monitor.

+ Joining Business Mentors New Zealand to create one of the country’s largest support networks for local business.

+ The MYOB Employer Resource Centre, a single location for all your employment needs.

MYOB backs Kiwi businesses

The other thing I love is that AccountRight Live makes it easier to file GST returns. Before I used AccountRight Live, I would be up half the night trying to get them finished, and it was something I dreaded having to do every two months. Now it’s not something I have to worry about anymore and that’s a huge load off my mind.

Denyse Forsyth Kruizey Kidz

For the last decade, MYOB has been developing systems and applications that help small businesses stay compliant and small business owners (SMEs) like you be more productive within your business.

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All the features you need to take care of business.

Quick and easy to set up, MYOB Essentials has all the features you need to take care of your day-to-day bookwork, including:

MYOB BankFeeds™

Link your bank account and save around 10 hours.

Always tax compliant

Fast and easy updates ensure your business is in line with the latest tax legislation.

Work together with your advisor

Share information with your accountant or bookkeeper without having to be in the same place.

Better manage cashflow

MYOB Essentials lets you manage your cashflow, invoices and tax liabilities in real time.

Safe and secure

You can securely store and manage supplier bills in your accounts to make your monthly obligations easier.

100% online

There’s no software to install on your computer, MYOB Essentials is fully accessible via your web browser.

Try for free

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Ideal for desktop users wanting to move online or needing a more customised solution.

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Take care of your people

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Meet your employer obligations

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+ Send and track invoices using your mobile

+ Better manage your cashflow with real-time invoice tracking

+ Easily see when customers view your invoices to minimise late payers

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myob.com 0800 60 69 62

We’re here to help

MYOB NZ Ltd. All rights reserved. No portion of this book may be reproduced mechanically, electronically, or by any other means including photocopying, without written permission from the publisher. MYOB NZ Ltd. L2 5 Sir William Pickering Drive, Christchurch. NSME189240-0916