Tax Types you need to know if you’re a business owner

Taxation is usually a complex subject. So, as part of our New Years present to all of you, we thought we could simplify the different tax types.

Some of the most common taxes are as follows:

Income Tax

Income tax is payable on profits for businesses and on personal income earned by
individuals. The rates of tax that applies depends on the type of entity or if you are an
individual.

Companies and Trusts pay tax on income at a rate of 28% and 33% respectively whereas
individuals pay tax at the marginal rates between 10.50% and 33%.

End-of-year tax (this is also known as terminal tax) is payable before 7 February the
following tax year, or 7 April the following year if you have a tax agent.

Provisional Tax
Provisional tax breaks up the income tax you pay to IRD by letting you pay it in installments during the year as opposed to one big sum at the end of the tax year.

Any taxpayer – whether they be an individual, company or trust – who earns income where tax is not deducted when it was received like self-employed or rental income may have to pay provisional tax.

You become a provisional taxpayer if the income tax due for the previous year (this is known as your residual income tax) was more than $2500. There are some other rules that applies to first year of business.

The payment is based on the provisional tax method you’ve chosen. There are four methods available to calculate your payments: Standard uplift, estimation, GST ratio method and the accounting income method (AIM).

In most cases, you will pay three installments of provisional tax throughout the year: 28
August, 15 January and 7 May, However, this may vary depending on the calculation
method and how often you file your GST returns.

The calculation methods, dates and provisional tax rules will be discussed in more detail in
more blogs to come.

Goods and Services Tax (GST)
GST is a tax on most goods and services supplied in New Zealand by registered persons. It
also applies to most imported goods, and certain imported services. GST of 15% is added to the price of taxable goods and services. If you're a GST-registered business, you pay GST on your supplies and collect GST on your sales. The difference between these two is what you pay to Inland Revenue.

You are required to register for GST if your turnover was more than $60,000 (average
$5,000 per month) for the last 12 months or expected to exceed that amount in the next 12 months.

There are 3 methods of accounting for GST: Payment, Invoice and Hybrid basis of which the payment basis is the most common and the filing frequency for GST is monthly, two and six monthly. The method and filing frequency are subject to rules that apply based on turnover.

Pay As You Earn (PAYE)
Employees earning a wage or salary are taxed directly from their pay. This is known as
PAYE (pay as you earn).  As an employer, you’re responsible for deducting and paying
PAYE on your employees’ behalf.

Different rules can apply to some payments, eg. lump sum payments like bonuses or
redundancy payouts, or to special types of workers. The amount of PAYE you deduct
depends on the employee’s tax code and how much they earn.

Each pay period you need to calculate and deduct PAYE. Each payday you send Inland
Revenue the pay details for your employees. This is called payday filing, and you can do all
of this directly from your accounting software (like SmartPayroll), or online through Inland
Revenue’s myIR service.

The easiest way to file your PAYE returns is to use a payroll software such as Smartpayroll.

Fringe Benefit Tax (FBT)
Benefits given to employees other than their salary or wages are fringe benefits which are
levied on the value of the fringe benefit provided to employees.

The main groups of taxable fringe benefits are:

• motor vehicles available for private use
• Free, subsidised or discounted goods and services
• Low-interest loans
• Employer contributions to sickness, accident or death benefit funds, superannuation
  schemes and specified insurance policies.

You’ll have to file an FBT return either quarterly or annually, depending on the election
made.

FBT can be calculated at 49.25% single rate (flat rate), or at multi rates depending on the
income of the employees.

FBT is tax deductible by the employer as an expense in their income tax return.