DSBM K4 Week 33 Seminar

KŌNAE AKO 4

Seminar: Business Taxation

HE PAEMAHI KŌWHIRINGA THE ELECTIVE PROJECT

Introduction

Ensuring that you comply with your legal tax obligations, both for your business and for your staff, need not be overwhelming. If you make an effort to get the tax, accounting, and record-keeping systems of your business up and running well from the start, the tax matters for your business will become quite straightforward. The mistake that a lot of businesses make is not considering their tax obligations until they arise, such as when they are required to pay provisional tax, or realise they are liable for fringe benefit tax.

Of all the issues a business must deal with, tax is one area for which getting professional help is of immense benefit, preferably from a chartered accountant. A lot of business owners can manage the basic tax calculations, such as GST and PAYE, but dealing with income tax and fringe benefit tax is more involved. Since the right professional will know all the finer details of the tax legislation (and there is a lot of it!), they are in a much better position to help you comply with legislation while at the same time helping you to minimise your tax liability.

However, you need to be aware that, ultimately, the responsibility for complying with your tax obligations rests with you, not your accountant. It is up to you to ensure the information you supply the IRD is correct, and that you pay your tax on time. As such, it is important that you keep comprehensive and up-todate tax records – you cannot expect your accountant to produce accurate financial statements if the information you provide them with is incomplete or unclear. In regard to paying your tax when it falls due, this is one of many reasons why financial planning is important. Note that Financial Planning is covered in a separate seminar topic.

USEFUL WEBSITE:

You may find it helpful to keep up to date with what tax measures the Government is planning for businesses so you are aware of changes before they come into force. The IRD provides regular updates on tax policy on the following website. You can also subscribe to their mailing list to be emailed updates:

• IRD, Tax policy news – http://taxpolicy.ird. govt.nz/.

Contents

This seminar will cover the following topics:

Part A: Income Tax

• Income Tax on Business Profits

• Depreciation

• Business Structures and Income Tax

• Rules for Taxing Offshore Income of New Zealand Businesses

• Provisional Tax

• Withholding Tax and Schedular Payments

Part B: Goods and Services Tax (GST)

• Introduction to GST and Taxable Supplies

• Registering for GST

• Accounting Basis for GST Registration

• Filing Frequency and Dates

Part C: Tax Obligations that Arise from Employing Staff

• PAYE and Other Employee Deductions

• KiwiSaver and Employer Superannuation Contribution Taxes (ESCT)

• Fringe Benefit Tax

Part D: Other Tax-Related Matters

• ACC Levies

• Penalties and Offences under Tax Legislation

• Record-Keeping

Part A: Income Tax

Income Tax on Business Profits

Although it is called ‘Income Tax’, businesses pay income tax based on the profit they earn, not on the income they earn. Businesses can claim business expenses against business income to arrive at their net profit. In other words:

Business income is revenue earned from the goods and services you sell. It includes income from invoices that have been issued to customers that have not yet been paid. This means that you will have to pay tax on all sales within a tax year, regardless of whether or not you have received the money.

Most businesses incur expenses when generating income. Most of these expenses can be deducted from income to arrive at taxable income. Therefore, the higher the business expenses, the lower the net profit and the less amount of income tax that needs to be paid. However, certain business expenses paid out of business income are not deductible or are only partially deductible. This means that not all money spent by the business will be counted as expenses, and thus not all expenses will reduce net profit and income tax.

Capital and Revenue Expenditure

In particular, it is important to understand the difference between capital and revenue expenditure. Capital expenses relate to the purchase of assets costing over $1,000 that will be used in the business for more than one year. Common examples of capital expenditure include computer equipment, vehicles, and office furniture. Unlike revenue expenditure, you cannot claim the full cost of a capital item as an expense in the year it was purchased.

For example, if you purchase a work vehicle for $30,000, profit for the year will not decrease by $30,000. This means that, for a company, the year’s tax bill will not decrease by $8,400 (i.e. 28% of $30,000). Instead, the cost must be spread over a number of years (the estimated useful lifetime of the asset) with only a portion being a taxdeductible expense each year. This is called ‘depreciation’. However, capital expenses costing $1,000 or less per item can be fully expensed in the year purchased.

On the other hand, revenue expenses are expenses incurred throughout the financial year that relate specifically to that year. Some common examples of revenue expenses include rent, advertising, and staff wages. Provided that they are deductible business expenses (see below), revenue expenses reduce profit and therefore reduce the amount of tax payable in the year that they are incurred.

Business Income – Business Expenses = Net Profit

Deductible Business Expenses

Common examples of business expenses that are deductible from income for tax purposes include the following:

• stock and raw materials purchased and sold / used within the year

• freight costs

• staff wages and salaries

• internet costs

• phone costs (mobile and fixed line)

• stationery and general office supplies

• repairs and maintenance (but not improvements to assets)

• petrol costs and costs associated with maintaining business cars (e.g. a Warrant of Fitness)

• business insurance costs

• electricity costs

• depreciation on capital items (computer, furniture, etc.)

• ACC levies and Fringe Benefit Tax (FBT) paid

• rent paid on business premises

• interest and bank fees

• a portion of household expenses (for home-based businesses only – see below)

Home Office Expenses

If you operate a business from your home, you will be able to claim a portion of your household expenses for the area of your home that is set aside for business purposes. Examples of household expenses that you may claim a portion of include rates (or rent), insurance, electricity, internet, maintenance, depreciation, and mortgage interest (if you own your own house). You cannot claim a portion of your mortgage principal.

There are two main options for doing this:

1. Claiming a percentage of expenses: You will need to calculate the size of the area set aside for business as a percentage of the total floor area of the house. You then apply this percentage to the relevant expenses. However, note that for internet expenses, you can only claim a ‘fair and reasonable’ amount – this will depend on your actual business usage and the type of internet plan you are on.

2. The ‘square metre rate’ option: This option involves claiming a set amount per square metre, determined by the IRD. This set amount excludes mortgage interest, rates, and rent, however you can claim these expenses using the first option (shown above). The 2020/2021 set rate is $44.75 per square metre.

HEI TAUIRA:

Example: James’ Household Expenses

James owns and operates a website development business. He has an office at home which he works from daily. James’ house is 240 square metres in size and the room that he has set aside as his business office is 9 square metres in size. As James’ office is 3.75% of the total house area, he can claim 3.75% of the related expenses.

James’ electricity bills for the year total $3,300 including GST ($2,869.57 excluding GST), so he is able to claim $107.61 as a business expense. This is calculated as 3.75% of $2,869.57. However, there are a number of other expenses James could claim, including part of his internet, his insurance, and even his fixed telephone line (since he uses it for business purposes).

James decides it will be easier for him to use the square metre rate option. He therefore claims $402.75 (calculated as 9 metres × $44.75) for the year. Since he owns his home, he does, however, also claim 3.75% of his annual rates and mortgage interest.

Entertainment Expenses

Be very careful with claiming entertainment expenses as some of these expenses may only be 50% deductible, and others may not be deductible at all.

For example, providing meals for staff while travelling on business is fully deductible, but the cost of meals you provide to a business contact while travelling are only 50% deductible. As another example, food and drink provided for a conference or staff training event is only fully deductible if the event lasts for more than four hours (not counting meal breaks) and if the main purpose of the event is not entertainment. This is a complex area of tax law, so it is best to check with your accountant before claiming entertainment expenses.

USEFUL WEBSITE:

For more detailed information about entertainment expenses, the IRD provides a guide (the IR268).

• IRD, Entertainment Expenses: A guide to the tax treatment of entertainment expenses – https://www. ird.govt.nz/income-tax/income-tax-for-businesses-and-organisations/types-of-business-expenses/ entertainment-expenses

NGOHE:

• Make a list of expenses that your business incurs which may be considered as ‘entertainment expenses’. These may include the staff Christmas dinner, a staff function held on business premises, a morning tea provided on business premises during a meeting, corporate box tickets at a sporting event, etc.

• Work through these lists to identify which expenses are fully tax deductible, which are 50% deductible and which are not deductible at all. Use the IRD guide, IR268 Entertainment Expenses, to assist you.

Non-Deductible Expenses

Examples of non-deductible expenses include:

• legal fees incurred in directly setting up the business

• drawings from the business (although note that if you are employed by your business, your wages / salary are deductible)

• loan principal repayments (note that the loan interest is deductible, but the loan principal is not)

• expenses that do not relate to the business (for example, the owner’s private expenses such as the sports fees for his son’s soccer team are not deductible)

Also, remember that capital expenses are not fully deductible in the year that they are purchased. The cost of equipment such as plant and machinery must be depreciated over a number of years. Improvements to equipment must also be depreciated, although note that general repairs and maintenance costs are fully deductible.

The over-riding requirement for tax deductible expenses is that there must be a clear connection between the expenditure and the deriving of gross income.

Depreciation

As already noted, depreciation involves spreading the cost of an asset over its useful lifetime. This is so that expenses for a period are better matched with income for the period, resulting in a more accurate representation of profit. Another way of looking at depreciation is that it is an expense that allows for the wear and tear on fixed assets. Fixed assets are items of capital expenditure – they cost more than $1,000 and have a useful lifespan of more than 12 months. However, not all fixed assets can be depreciated. One example is land. This is because land typically increases, not decreases, in value over time.

You are required to maintain a fixed asset register to show assets you will be depreciating in your business. The fixed asset register needs to show the cost of each asset and the date it was purchased. If you are registered for GST, the cost shown needs to be GST exclusive. The register should also show the amount of depreciation claimed and the adjusted tax value of each asset. The adjusted tax value is the asset’s cost price, less all depreciation calculated since purchase (also known as ‘accumulated depreciation’).

Calculating Depreciation

In most circumstances, you can choose between either the diminishing value method or the straight-line method of calculating depreciation.

If using the diminishing value depreciation method, the amount of depreciation is calculated as a percentage of the adjusted tax value of the asset. Remember, this value is the original cost less any depreciation already claimed in previous years. Since the adjusted tax value of the asset will get smaller each year, the amount of depreciation also gets smaller. This is why it is called the ‘diminishing’ value method.

If using the straight-line depreciation method, the amount of depreciation is calculated as a percentage of the original cost price of the asset. As the original cost price does not change, neither does the amount of depreciation claimed each year.

Choosing a Depreciation Method

It is important to note that you do not have to use the same depreciation method for all your assets, but you must use whatever method you choose for an asset for a full year. The method used for an asset can be changed from year to year.

Once you have decided on the method (or methods) that you will use to account for depreciation, you have to identify the correct rate for calculating the amount of the depreciation. The depreciation rates for various assets are set by Inland Revenue, and are based on the cost and the useful life of the asset being depreciated.

USEFUL WEBSITE:

The IRD provides information online about depreciation methods.

• IRD, Depreciation methods – https://www.ird.govt.nz/income-tax/income-tax-for-businesses-andorganisations/types-of-business-expenses/depreciation/claiming-depreciation

Before you use the calculator, you will need to know:

• the business balance date,

• the cost of the asset (if you are GST registered, use the GST exclusive cost, if you are not GST registered, use the GST inclusive cost),

• the date of purchase of the asset, and

• the percentage of business use (if not 100%).

Figure 1 shows an example of calculating depreciation for a car which was purchased for $36,000 and is being depreciated on a diminishing value basis at a rate of 30%:

If the car in the example above is depreciated using the straight-line method, the approved IRD rate is 21%. The GST-exclusive cost is $36,000, so the depreciation to claim each year is $7,560 (i.e. $36,000 × 21% = $7,560). After three years, a total of $22,680 would have been depreciated. In comparison, the example above which uses the diminishing value method, shows that a total of $23,652 would have been depreciated after three years (calculated as $10,800 + $7,560 + $5,292).

As you can see in the tables above, the amount of depreciation claimed each year using the diminishing value method reduces. If the straight-line method was used instead, the car would be fully depreciated within five years ($36,000 ÷ $7,560 = 4.76 years).

Figure 1: Example of Diminishing Value Method of Depreciation on a Car Purchased for $36,000

The IRD resources, IR260 ‘Depreciation – a Guide for Businesses’ and IR265 ‘General Depreciation Rates’, contain further examples of depreciation calculations.

Of note is that you may use a pool system to depreciate low-value assets (which cost $2,000 or less, or have been depreciated so that the adjusted tax value is now $2,000 or less) collectively rather than individually and depreciate them as single assets. For example, instead of working out depreciation for six different computer software packages, you can lump them all together and treat them as one asset.

However, if you do this, you must use diminishing value depreciation rates. Further, if the depreciation rates vary for the different assets in the pool, you must apply the lowest depreciation rate of these assets to the entire pool of assets.

Business Structures and Income Tax

Different tax rules apply depending on whether you are a sole trader, a partnership, a company or a trading trust. However, you should not decide which structure your business will operate under solely on the basis of how the profits are to be taxed. A range of other considerations have to be made such as those relating to the degree of asset protection offered by the structure and the legal obligations and administration involved in running the structure.

An accountant or legal professional (ideally someone with both an accountancy and law background), can help you decide what is best for you. If you are already in business, you may decide to change structures.

Sole Traders

A sole trader is a person trading in their own name. They pay income tax on business profits based on the personal income tax rates. These rates are shown in Figure 2.

Note that business profits are not the same thing as drawings. Profit is equal to business income less business expenses. In contrast, drawings are any amounts taken from the business. Sole traders may choose whatever level of drawings they like – however, this is unlikely to be exactly the same amount as net profit. So, for example, if a sole trader reports a profit of $14,000 for the year, but the owner actually withdrew $20,000 throughout the year, the business will be taxed on the $14,000 profit, not the $20,000 of drawings.

Figure 3 shows how much tax a sole trader would pay in two scenarios. In Scenario 1, the business makes a profit of $38,000 before tax; and in Scenario 2, the business makes a profit of $90,000 before tax.

Figure 2: Personal Income Tax Rates

$0 - $14,000 at 10.5%

$14,001 - $48,000 at 17.5% $4,200.00

$5,950.00

$48,001 - $70,000 at 30% - $6,600.00

$70,001 and above at 33% -

Profit After Tax

Partnerships

A partnership is where two or more people join together to run a business. Of note is that a partnership itself does not pay income tax on the profits. Instead, the profits are distributed to the individual partners, who then pay tax on their share of the profit.

The percentage of profit each partner receives is based on the arrangement that is written in the business’s partnership agreement. For instance, the arrangement may be that Partner A gets a 60% share of the profits and Partner B gets a 40% share of the profits. If no arrangements for profit splitting are made in the partnership agreement (perhaps because there is no partnership agreement at all), then under the Partnership Act 2019 the profits are to be shared equally between the partners.

Once the profits of the business are allocated to the individual partners, they are taxed according to the personal income tax rates previously given in Figure 2. All the profits of a partnership have to be distributed to individual partners each year – that is, the profit cannot be kept in the business to avoid payment of tax!

One of the main benefits of a partnership is the opportunity for income splitting – particularly in the situation of a husband and wife in partnership. For example, if a sole trader business earns a net profit of $90,000, the sole trader must pay some tax at the tax rate of 30% (for amounts between $48,000 and $70,000), and some at the highest tax rate of 33% (for amounts between $70,001 and $90,000). However, if a partnership with two equal partners in the business earns a net profit of $90,000, each partner will only pay tax on a net profit of $45,000, meaning that all tax will be paid at the lower rates of 10.5% (up to $14,000) and 17.5% (for amounts between $14,001 and $45,000).

This means that if the partners are from the same family, the overall impact is that their household receives more after-tax income than if one of the partners had instead operated the business as a sole trader. However, care must be taken to ensure that income splitting is not simply an effort to reduce tax. For example, someone who has nothing to do with the business should not be a partner just so that their household will benefit from income splitting. Even profit allocated between valid partners (i.e. partners who are all involved in the business), must be reasonable.

Figure 3: Sole Trader Income Range and Tax Rate

Companies

A company is a legal entity in its own right, separate from its shareholders (the owners). Company profits are taxed at a flat rate of 28%.

Whilst the company tax rate is lower than the highest two personal marginal tax rates (30% and 33%), this does not necessarily mean the business owner will pay less tax. This is because tax must be paid when profits are distributed to owners.

A company may choose to keep profits within the business, or pay part or all of its profits to shareholders as dividends. Shareholders pay tax on the dividends received at the relevant personal marginal tax rate. The amount they will pay depends on how much income they have earned for the year. If they have already earned more than $48,000, the relevant tax rate would be higher than the company tax rate.

HEI TAUIRA:

Example: Nikau

Nikau works part-time while he is studying at university. He earns a personal income from his job of $21,000 per year, and therefore his marginal tax rate will be 17.5%. Nikau also owns shares in several different companies and is able to earn an income from these dividends. Any dividends that he then receives (up to $27,000), will be taxed at the same marginal tax rate of 17.5%.

However, this year Nikau receives $35,000 in dividends. This means that he will be earning more than $48,000 in total and thus his marginal tax rate will increase. Therefore, $27,000 of his dividends will be taxed at 17.5% and the remaining $8,000 will be taxed at the higher marginal tax rate of 30%.

An important feature of New Zealand tax law is, however, that an imputation tax credit applies to the dividends paid. This means that tax to be paid by the shareholders is offset against the tax that the company has already paid on that income. The effect is that profit is not taxed twice.

So, for example, if a company makes a profit of $100,000, it will pay $28,000 (i.e. 28%) in tax. If all of the remaining $72,000 is then distributed as dividends, shareholders will only pay tax on their share of the profits if their marginal tax rate is higher than 28% – shareholders may even be entitled to a tax refund.

Example: Kīmai and Terrence

Kīmai and Terrence each own 50% of the shares in their company. Kīmai is employed by the company on a salary of $75,000. Terrence does not work in the company, but earns $37,000 in wages from another job. The company makes a profit of $50,000 and pays tax on this at 28% (which equals tax of $14,000). This leaves an after-tax profit of $36,000. Kīmai and Terrence decide to distribute $20,000 of this as dividends to themselves ($10,000 each).

Since Kīmai already earns $75,000, the top personal tax rate of 33% applies to any further income Kīmai receives. This would be $3,300 (33% of her half of the dividends). However, the dividends were distributed with imputation credits attached. This means that Kīmai only needs to pay the difference between what the company already paid and what she is required to pay – that is 33% less 28%. The overall impact is that Kīmai does pay 33% on the income she received as dividends, but 28% of this is paid by the company and 5% is paid by her.

Terrence, on the other hand, has a lower personal tax rate (17.5%). When he receives his dividends, he does not need to pay any tax. In fact, since the company already paid tax at the higher rate of 28%, Terrence can claim a refund of 10.5% of the dividends (that is, 28% tax paid by the company less 17.5% tax actually payable by Terrence).

HEI TAUIRA:

Figure 4 shows the effect of tax on each of the three business structures. Let us assume that the business has managed to earn an $82,000 profit for the tax year.

Figure 4: Tax Rate Effects on Different Business Structures for a Profit of $82,000

Profit up to $14,000

(Total of $28,000 – i.e. $14,000 for each partner)

Profit between $14,001 and $48,000

(Total of $54,000 – i.e. $27,000 for each partner)

The example in Figure 4 assumes that individuals received no other income apart from business profits. If this business was structured as a sole trader, the tax liabilities would be $17,980.00. As a company, the business would be liable for a greater amount of tax totalling $22,960.00. However, the lowest amount of tax would be paid under a partnership, to a total of $12,390.00 ($6,195.00 per partner).

From a purely tax point of view, a partnership structure would be the most advantageous for this particular tax period. However, note that as the amount of net profit earned changes, a partnership may not necessarily be the most advantageous form of entity (in regard to tax). If profits increase, it may become more beneficial to operate as a company where the flat tax rate of 28% applies. Also, remember that operating under a partnership or sole trader entity may not be the best option for you, for reasons that do not relate to taxation.

Trading Trusts

Like other forms of trusts, a trading trust is set up under a deed and it is the role of the trustees to administer and manage the trust for the benefit of the beneficiaries. Income created by the trust in an income year and distributed to beneficiaries (either during the income year or within six months of the end of the income year) is taxed at the beneficiaries’ marginal tax rates. Income that is not distributed to beneficiaries is taxed at the trustee rate of 33% (which is equal to the highest personal marginal tax rate).

Given that the company tax rate is 28%, any income earned and retained by a trading trust costs 5% more in tax than if that income had been earned and retained in a company. However, remember that, if a company is to then pay money out to its shareholders, the shareholders’ marginal tax rates will then apply, which may be 33%.

Look-Through Companies (LTCs)

Another type of company is a ‘look-through company’ (LTC). The main difference between a business which is set up as an LTC and one that is set up as a normal company is in the way that it is taxed.

If your business is an LTC, the profits of the business are passed on to the shareholders and are then taxed together with the shareholders’ other income at the relevant personal tax rate. Often people choose to set up LTCs if they expect to be earning a loss in the business for some time. This is because, when it comes to working out how much income tax is owed for the year, tax is calculated on the individual’s income from other sources less the loss from the LTC. A common example of this type of business is one that invests in property (as there often is not a profit for a number of years due to the amount of mortgage interest to be paid).

HEI TAUIRA:

Example: Mila

Mila is the sole shareholder in an LTC. In the most recent financial year, the LTC made a loss of $10,000. Mila also works at a timber mill where she earnt wages of $50,000 in that same year. Mila already paid income tax (via PAYE) on her wages. However, the $10,000 loss reduces her $50,000 income to $40,000 for tax purposes. This means that she is eligible for a refund for the tax she paid on $10,000 of her wages.

There is, however, a restriction regarding the amount of losses that you can offset against your personal income – the amount of the loss is limited to the owner’s actual economic losses. In other words, the amount of the loss cannot be more than the value of what someone has in a business (this amount is referred to as the “owner’s basis”).

The formula for calculating the owner’s basis is as follows:

Owner’s Basis = Investments – Distributions + Income – Deductions – Disallowed Amounts.

Where the value of:

• Investments = the amount of equity that the owner has in the business.

• Distributions = amounts paid out to the owner (including dividends, loans, and current account balances, but not including wages or salaries).

• Income = owner’s share of the income and any capital gains.

• Deductions = the owner’s share of deductions (expenses) and any capital losses.

• Disallowed amounts = the amount of investments made by an owner within 60 days of the last day of the income year, if these investments are (or will be) distributed or reduced within 60 days after the last day of the income year. This restriction stops a shareholder from temporarily putting a lot of money into the business near the end of the tax year, just so they can increase the amount of the loss that can be offset against their personal income. However, if the amount is less than $10,000, it can be ignored.

USEFUL WEBSITE:

The IRD provides information online about the tax situation for look-through companies.

• IRD, Look-Through Companies IR879 – https://www.ird.govt.nz/income-tax/income-tax-forbusinesses-and-organisations/income-tax-for-companies/look-through-companies/becoming-a-lookthrough-company/choose-to-become-a-look-through-company

• Part 1 – Business structures and record keeping – https://www.ird.govt.nz/about-us/videos/webinars/ introduction-to-business/business-structures-record-keeping

Rules for Taxing Offshore Income of New Zealand Businesses

When a business earns profits outside of New Zealand, that profit can potentially be subject to two taxes –the foreign country may tax it and then New Zealand may tax it. To reduce this problem, New Zealand has 40 Double Tax Agreements (DTAs)1 with its main trading and investment partners and these eliminate certain forms of double taxation. These agreements basically decide which country you will pay tax to.

The DTAs also reduce other tax-related obstacles to international trade. For example, they exempt some short-term activities in the foreign country from income tax and provide disputes resolution procedures.

Provisional Tax

Provisional tax is a way of paying your income tax in advance. It is not an additional tax on top of income tax. It is designed to help businesses keep up to date with taxes and ensure that the IRD is paid. Only those businesses that have very small business profits (that result in residual tax of up to $5,000 in the previous year) do not have to pay provisional tax. Thus businesses are not required to start paying it until their second year in business. Note that residual income tax is simply the amount of income tax on the previous year’s profit, less any tax credits it is entitled to.

1 Inland Revenue Department. (2017b).

Instead of waiting until after the financial year has finished and your accounts completed to find out how much profit you made and thus how much tax is payable, paying provisional tax involves paying some tax through the year and then ‘squaring up’ after the year is over and your profit is finalised. Provisional tax payments are made before actual net profit for the year is determined, and therefore businesses do not usually pay the exact, correct amount of tax through their provisional tax payments – some pay too little and others pay too much.

At the end of the year, when the correct amount of income tax for the year is calculated, any provisional tax you have already paid throughout the year is deducted from this tax bill. If you have paid too much provisional tax, you will receive a refund. If you have not paid enough, you will need to pay any outstanding amount (referred to as ‘terminal tax’).

Calculation Methods

There are four methods for calculating how much provisional tax to pay:

1.

The Standard Option

The standard option calculates provisional tax based on the previous year’s residual income tax (RIT) plus 5%. In other words, this method assumes that your business will increase the previous year’s profits by 5%.

2. The Estimation Option

Under the estimation option, businesses estimate their profit and then base provisional tax payments on this estimated profit. In the past, this has been a popular choice for businesses which expect to have profits that are quite different from the previous year – estimating profits helps avoid paying too much terminal tax when you do not have enough money, and also avoids underpaying tax through the year and being left with a large terminal tax bill. However, the ratio option and AIM method may now be better options for dealing with this type of situation.

3. The Ratio Option

This method is designed to assist with a business’s cashflow by aligning the income tax payable throughout the year with the GST supplies (income / sales) made. It involves paying provisional tax at the same time GST is paid, with the amount payable being a percentage of the GST supplies for the period. In other words, if you are registered for GST on the cash basis, you pay a set percentage of the income you actually receive as provisional

Residual Income Tax From Previous Income Year

Ratio = × 100

GST Taxable Supplies from the Previous Year

tax. The percentage (or ratio) is calculated by the IRD using the following formula: For example, if the IRD informs a business that their ratio is 16% and the amount of sales income (GST taxable supplies) shown on their GST return for the past two months is $65,000, the business will need to pay $10,400 in provisional tax for that period.

The GST ratio option is only available to businesses with a residual income tax of less than $150,000 in the previous year (but not to partnerships). The business must be registered for GST and pay monthly or twomonthly to use this option, and must have been in business for at least a full financial year, and part of the year before that. Furthermore, the ratio must be between 0 and 100%.

4. The Accounting Income Method (AIM)

This is the newest method available for calculating and paying provisional tax, and likely to be the most accurate option for businesses. This is because it involves paying provisional tax based on the amount of profit your accounting software shows you have made for the period. To use this option, you must be using accounting software which is set up to work with the IRD online system. At the time of writing, only Xero, Reckon, Tax Gnome and MYOB software offered this functionality.

When using AIM, you pay provisional tax two-monthly, unless you are registered to pay GST monthly, in which case you also pay provisional tax monthly. Note that you do not have to be registered for GST to use AIM. In addition to being more accurate, a benefit of AIM is that you may be entitled to an immediate refund if your accounting software shows a loss for the month (or two-month period).

Due Dates

All provisional tax due dates are aligned with GST due dates. However, all businesses do not necessarily pay provisional tax on every GST due date. Instead, due dates for paying provisional tax depend on:

• the provisional tax calculation method being used,

• if they are GST registered, the frequency with which they pay GST, and

• the business’s balance date.

Businesses which use the standard or estimation options pay tax in three instalments per year (unless they are registered for GST and pay it six-monthly). These are outlined in Figure 5.

Non-standard balance date 28th of the fifth month following the balance date. 28th of the ninth month following balance date. 28th of the thirteenth month following balance date.

Some businesses are required to pay provisional tax two-monthly, at the same time GST payments are due. These businesses include those which:

• use the GST ratio option and are registered to pay GST monthly or two-monthly

• use AIM and are registered to pay GST two-monthly or six-monthly, or not registered for GST at all.

These dates are shown in Figure 6. Note that if you do not have a standard balance date, you might be required to pay provisional tax on the GST due dates not shown in this figure.

Figure 6: Provisional Tax Payment Dates for Businesses Required to Pay Provisional Tax Two-Monthly and have a standard balance date

Figure 5: Provisional Tax Payment Dates for Most Businesses which Use the

For businesses that use the ratio option and pay GST six-monthly, there are only two due dates per year. These dates are shown in Figure 7.

Figure 7: Provisional Tax Payment Dates for Businesses Required to Pay Provisional Tax Six-Monthly

Finally, businesses which use the AIM method and are registered to pay GST monthly must pay provisional tax monthly (on the GST due dates).

USEFUL WEBSITE:

More information on how to calculate provisional tax (and the due dates to pay the tax) is given on the IRD website.

• Understanding provisional tax – https://www.ird.govt.nz/-/media/project/ir/home/documents/forms -and-guides/ir200---ir299/ir289/ir289-2021.pdf?modified=20210513043602&modified= 20210513043602.

Withholding Tax and Schedular Payments

The taxes and payments referred to in this sub-section are all taxes on income that are levied at the source. This means that the tax is deducted from the income and then paid to the Government before the recipient of the income ever sees it.

Resident Withholding Tax

Resident Withholding Tax (RWT) is a tax on investment income. For a small business, it is most likely your RWT will only need to be paid on money in savings accounts. The bank automatically deducts this RWT from any interest they pay you and sends you a statement at the end of the year to show the amount deducted. RWT paid during the year can be claimed as a tax credit by businesses in their end of year income tax returns.

However, there may be times at which you need to deduct RWT from payments you make to others, and must register with the IRD as a payer of RWT. One situation is if you pay over $5,000 per year in interest payments to certain investors. The amount of RWT payable will depend on whether the investor has chosen an interest rate, and whether they are a company or individual (although note that the rates are aligned with the personal and company income tax rates). A more involved situation is if you operate as a company and issue dividends to shareholders. In this case, RWT is usually deducted at a flat rate of 33% and there is no need to register as the IRD automatically registers companies as RWT payers.

Non-Resident Withholding Tax (NRWT)

NRWT is payable on any interest, dividends and royalties that are paid to someone who is not a New Zealand resident for tax purposes. If your business pays non-resident withholding income to any person, then you must deduct NRWT at the same time as you make this payment.

You must also register with Inland Revenue who will give you more information about accounting for and paying the tax – refer to http://www.ird.govt.nz/nrwt/

Schedular Payments

Some businesses have their main income (i.e. not just their investment income) taxed at the source like RWT or PAYE. This is referred to as ‘Tax on Schedular Payments’. If your business conducts any of the activities listed on the back of the IR330C form, income from these activities will have tax deducted. Businesses on this list are mainly contractors. A few examples of business activities to which schedular payments apply are:

• Shearing contractors

• Agricultural contracts for maintenance, development, or other work on farming or agricultural land

• Contracts wholly or substantially for labour only in the building industry

• Modelling

This means that, even if your business does not earn income in any of these ways, if you contract other businesses to work for you doing any of these types of jobs, you will need to deduct tax on their payments and forward it to the IRD. These deductions are to be recorded in the same IRD returns in which employee PAYE is recorded, and tax payments should be made together with employee PAYE.

Contractors and employees who are liable to pay withholding tax must fill out an IR330C. This will determine the amount of tax to be deducted (as it varies from activity to activity). If they do not fill out a form, or it is incomplete, then an employer must deduct withholding tax at a higher, no declaration rate, until they do fill this out.

If your business activities are on the list for which tax on schedular payments applies, you can apply for a Certificate of Exemption. Holders of a current Certificate of Exemption do not have to have this tax deducted, and instead pay their income tax in the same way that other businesses do. They must, however, get the certificate renewed each year. In order for the IRD to provide you with a certificate, you need to have a good record for filing returns and paying tax when it is due.

Some businesses choose not to apply for a certificate simply because having income tax deducted at the source helps with their cashflow planning. That is, by paying their income tax as income is received, their end of year tax bill is reduced or eliminated.

USEFUL WEBSITES:

More information on RWT, NRWT, and schedular payments is given on the IRD website:

• Resident withholding tax – https://www.ird.govt.nz/rwt/

• Non-resident withholding tax – https://www.ird.govt.nz/nrwt/

• Contractors receiving schedular payments – https://www.ird.govt.nz/contractors/contractors-schedularpayments-home.html

• IR330C Tax rate notification for contractors – https://www.ird.govt.nz/income-tax/withholding-taxes/ schedular-payments

Part B: Goods and Services Tax (GST)

Introduction to GST and Taxable Supplies

GST is a tax on goods and services in New Zealand. It is also applied to most imported goods and some imported services. GST is added to the price of taxable goods and services at a rate of 15%.

For GST purposes, a taxable activity is any activity carried on continuously or regularly by a business. The IRD refers to goods and services that are GST taxable as ‘Taxable Supplies’. You will need to know this when completing GST returns. Some activities, such as those of an individual working for a wage or being a company director, do not attract GST. Some supplies also do not attract GST (i.e. they are GST ‘exempt’). Examples are interest received, bank charges, financial services, and income from renting a dwelling for use as a private home.

Other supplies are zero-rated, which means the GST is charged at 0%. Examples are duty free and exported goods. If you’re importing goods commercially, you’ll need to be aware that they are subject to duty, GST, and possibly other charges. GST paid on imported goods can be claimed as a GST credit (expense). GST is also zero-rated for transactions involving land if the seller and purchaser are both registered for GST.

Exported goods and services provided to a purchaser who is outside New Zealand are zero-rated which means that GST is charged on them at 0%. If you are a GST-registered New Zealand-owned business providing goods and services to customers in New Zealand over the internet, you will need to charge GST at normal rates. However, if you sell over the internet to overseas customers, GST on these transactions will generally be zero-rated. Reasonable care must therefore be taken to verify the location of the customer and the destination of the goods and services to determine whether or not you charge GST.

Registering for GST

It is compulsory for businesses to register for GST if their annual turnover was over $60,000 for the past 12 months or is expected to be over $60,000 for the next 12 months. If your annual turnover is less than $60,000, you may choose to voluntarily register for GST.

Note that ‘annual turnover’ is not the same thing as net profit. Instead, annual turnover is the total value of taxable supplies made (excluding GST) during the period. For most businesses, the annual turnover is the same thing as the total amount of income (e.g. sales) received for the period, including any grants or subsidies received and barter transactions.

All GST registered businesses are allocated a GST number by the IRD. If you are GST registered, you are required to charge GST on your sales and income (you can easily add GST by multiplying the price by 1.15).

Inclusive Price = Price × 1.15

You can then claim GST back for those of your purchases and expenses that have GST included in them. You can either calculate the GST content of purchases by dividing the purchases and expenses figure by 1.15 and then subtracting the result from the original figure, or by using the following equation:

You can then calculate the difference between GST received and GST paid to work out if you have to make a GST payment to the IRD, or if you will receive a GST refund from the IRD.

Accounting Basis for GST Registration

There are three different methods by which you can account for GST. Each method is referred to as an ‘accounting basis’. When you register for GST, you must select one of these three methods.

The Payments Basis

This is the most common basis for small businesses to use, and is sometimes called the ‘cash basis’. Under the payments basis, businesses account for GST in the period in which they make or receive payment – which is not necessarily the same period in which the work was performed (or goods were sold) and in which invoices were issued.

This means that if your business registers on this basis, you do not have to pay GST on your sales income unless your customers have paid you. For small businesses where cashflow is often critical in the first few years, this basis helps eliminate cashflow problems. On the other hand, you cannot claim back GST on your purchases and expenses until you have actually paid for them.

The payments basis is not available to businesses which have an annual turnover of over $2 million.

The Invoice Basis

Under the invoice basis, businesses account for GST in the taxable period in which an invoice is received or issued (or when payment is received or made, whichever is first). The advantage of the invoice basis is that you may be able to claim back GST on purchases before actually making payment for those purchases. If you are just starting out in business and have a lot of expenses and purchases, but not yet a lot of sales, this may be to your advantage.

However, the disadvantage is that you may have to pay GST to the IRD before actually receiving payment from customers. Over time, the amount of money coming into a business should, on average, be higher than the amount of money going out of the business, so this method is usually less advantageous for businesses.

For example, if, in a particular period, you made $1,000 + GST of sales and had $400 + GST of expenses, you would be able to claim back the $60 of GST on your expenses (even if you had not yet paid your bills), but would still have to pay the $150 of GST on the sales (even if your customers had not yet paid you). This is the main reason why the payments basis is used more often than the invoice basis.

The Hybrid Basis

This is the least popular method of accounting for GST. Using the hybrid basis, you account for GST on your sales using the invoice basis and claim GST on your purchases using the payments basis. This means that this basis combines the disadvantages of both the payments basis and the invoice basis: that is, you cannot claim back GST on purchases and expenses until you have paid for them, but you must pay GST on all income invoiced out during the period, even if you have not yet received payment!

Filing Frequency and Dates

Businesses can file GST returns monthly, two-monthly, or six-monthly. Most businesses file GST returns twomonthly – this is considered the ‘standard’ option.

The option of filing returns six-monthly is only available to small businesses, specifically those that have a turnover of less than $500,000 per annum. Larger businesses (with a turnover of more than $24 million per annum) must file GST returns on a monthly basis.

All GST filing and payment dates are aligned to the business’s balance date. Returns are filed, and payments made, on the 28th of the month following the GST period. For example, for a business that pays GST two-monthly, payment for GST from the months of April and May will be due by 28 June.

There are two exceptions to this, those being returns and payments for periods ending in November and March:

• To avoid having to file a GST return over the Christmas season (i.e. on 28 December), GST for periods that end in November is not due until 15 January.

• Similarly, for periods that end in March (which is the end of the financial year), returns do not need to be filed until 7 May.

Also note that if the due date falls on a weekend, payment is not required until the next working day.

8: GST Filing Frequency and Dates for Businesses with a Standard Balance Date

Monthly 28th of each month, except for the November period (due 15 January) and the March period (due 7 May).

Late filing penalties apply to GST returns filed after the due date. If you are registered on the payments basis, this penalty is $50. If you are registered on either the invoice or hybrid basis, this penalty is $250.

More information on GST, and adjustments to GST is given on the IRD website: • GST workshop – Part 4 – Adjustments – https://www.ird.govt.nz/about-us/videos/webinars/gstworkshop/adjustments

Figure

Discussion Questions:

• If you are GST registered, which accounting basis and which payment frequency do you currently use? Do you think this is the best option for your type of business and for your cashflow throughout the year? Why did you choose it?

• Case Study: Tāne’s GST. Tāne has just started a part-time cycle repair business and has decided to register for GST. Tāne has chosen a one-month taxable period. In May, Tāne completed a major repair job on a bike which he charged $575.00 for, including GST. He has issued an invoice for this job but has not yet been paid. He has, however, received the bill from the bicycle-part supply company for the parts he ordered for this job (although he has not yet paid this bill). The only other jobs Tāne did through the month involved fixing punctures. In total, he fixed 10 punctures, for which he charged and received $11.50 including GST each.

a. What date must Tāne file his GST return by?

b. If Tāne is registered on the payments basis, how much GST will he owe?

c. If Tāne is registered on the invoice basis, how much GST will he owe?

d. If Tāne is registered on the hybrid basis, how much GST will he owe?

Part C: Tax Obligations that Arise from Employing Staff

PAYE and Other Employee Deductions

If you are intending to employ staff, you must tell the IRD. You can use the ‘Register as an employer’ service on the IRD website to do this or you can download and fill in a printable Employer Registration form (IR334) and post it back.

USEFUL WEBSITE:

If you are considering changing your business to a company structure, you can register as an employer, apply for a company IRD number, and register for GST when you incorporate your company online with the Companies Office.

• Incorporating a Company – https://companies-register.companiesoffice.govt.nz/help-centre/startinga-company/incorporating-a-company/.

• Employer obligations – https://www.ird.govt.nz/about-us/videos/webinars/employers-workshop

PAYE (which stands for ‘Pay As You Earn’) is the system used by employers to deduct income tax from the pay or earnings of their employees. As an employer, you must make PAYE deductions from your employees’ earnings and pay these deductions to the IRD. You must file an employment information form every time you pay your employees. This is based on the date you pay employees (pay day) and may be weekly, fortnightly, monthly or more often if you have multiple paydays. You do not need to file if you do not pay employees during your regular pay cycle.

Tax Codes

The amount of deductions made from an employee’s pay will depend on their tax code. Employers must ensure that employees complete a tax code declaration form (an IR330) in which they choose the tax code that reflects their particular circumstances. The employer will then use this tax code to make sure the correct tax deductions are taken from the employee’s earnings.

Most employees have one regular job that is their main source of income and use either the tax code ‘M’ or ‘ME’. The tax code ‘ME’ provides for the Independent Earner Tax Credit (IETC). The IETC gives employees who earn between $24,000 and $48,000 per annum, and also meet a range of other criteria (including not receiving ‘working for families’ tax credits, NZ Superannuation, an income-tested benefit, or Veteran’s Pension), the following tax credits are received:

• $10 per week if your net income is between $24,000 and $44,000

• 13 cents for every dollar you earn over $44,000

The other common tax codes are ‘M SL’ and ‘ME SL’, which apply to individuals with a student loan. If an employee does not complete the Tax Code Declaration form, the employer must deduct PAYE from his or her earnings at the no-declaration rate of 45% (plus the ACC earners’ levy).

Taxpayers using a secondary tax code may see deductions from their second income made at a higher rate than from their primary income. This is in an effort to ensure that individuals pay close to the right amount of income tax throughout the year and are not lumped with a large tax bill at the end of the year.

HEI TAUIRA:

Example: Secondary Tax Rates

Maia is trying to work out her tax rates. She currently has only one job, earning $58,000 per annum as a senior administrator. The amount of PAYE to be deducted, as specified in the PAYE tax tables, will reflect the fact that the first $14,000 of her income should be taxed at 10.5%, the next $34,000 will be taxed at 17.5%, and the remaining $10,000 should be taxed at the higher rate of 30%.

Maia is considering reducing her current role to part-time and taking up a part-time position as an accounts clerk, to gain more experience in the subject. She works out that she will still earn the same amount per year, but wants to ensure that she is paying the correct tax rate for both jobs. She calculates that her main job will earn $48,000 and the accounts clerk position will earn $10,000 per year ($192.30 per week). Maia looks online and sees she will pay $60.26 in PAYE each week from her second job – that is approximately 31% of what she receives from the job!

If each employer were to use the normal PAYE tables (not the secondary tax tables), the first $14,000 that Maia earns from the senior administrator position, as well as the entire $10,000 she earns as an accounts clerk, would be taxed based on the lowest marginal tax rate of 10.5%. This means that Maia would not have paid enough tax at the end of the year and when it is found that Maia actually earned $58,000 in total, she would have a sizeable amount of tax to pay!

In circumstances in which using the secondary tax code leads to the taxpayer paying more tax in a year than the total amount due, they will be eligible for a refund.

Deductions

The amount of PAYE to deduct from an employee’s wages is shown in the PAYE deduction tables which are available online. These PAYE amounts include both income tax and the ACC earners’ levy.

PAYE is not the only deduction that employers may need to make from their staff members’ wages. The PAYE deduction tables also show amounts to deduct for student loan payments and for KiwiSaver contributions (if applicable). Another deduction from employee pay that employers are often required to make is that of child support payments. If one of your employees needs to have child support payments deducted from their income, the IRD will contact you and ask you for details such as how often you pay wages and the next regular payday for your employee. Once they have calculated how much child support needs to be deducted, they will send you a Child Support Deduction Notice which shows the amount to deduct and the payday from which you need to start making this deduction.

Also recall from Part A of this seminar that you may have to make tax deductions from payments to some of your contractors (Tax on Schedular Payments). You will only need to do this if the business activity that the contractor performs is on the IRD’s list of affected activities on the back of the IR330C, and if the contractor does not hold a current Certificate of Exemption. These deductions do not include an ACC levy as self-employed people will be invoiced for their ACC levies independently, nor will employers make deductions for student loans, child support, and KiwiSaver when making deductions for tax on schedular payments.

Non-taxable allowances are payments made to compensate staff for expenses or wear and tear that are incurred on their employer’s behalf while working. They are not subject to PAYE. Common non-taxable allowances are: tool allowance, laundry allowance, meal allowance, and some travel allowances.

When you make additional payments to employees, such as annual bonuses, these are referred to as ‘lump sum payments’. Deductions on lump sum payments are treated differently to those for normal pay. Instead of looking up the amount of the deduction in the relevant PAYE table, employers are to deduct tax at a flat rate. These rates are shown at the beginning of the PAYE tables and on the IRD website. If the income being received is from the employee’s primary source of income (i.e. not a secondary job) the appropriate rates are shown in Figure 9.

Figure 9: Deductions on Lump-Sum Payments to Employees

HEI TAUIRA:

Example: Lump-Sum Tax Rates

Jacob owns and operates a plumbing business, along with his employee Arthur. Business has been going well throughout the year, and as Christmas approaches, Jacob decides to give Arthur a bonus payment for all his hard work. Arthur receives a bonus payment of $2,000, and he wants to make sure that he pays the correct tax rate on this lump sum.

Arthur’s fortnightly pay varies quite a lot. He had worked a lot of hours over the past four weeks and earned gross wages of $2,500 in one fortnight and $2,400 in the other. However, there have been some weeks during the year where he only earned between $1,500 and $1,600 per fortnight.

The grossed-up annual income for Arthur would be $63,700 (calculated as $4,900 × 13, as there are 26 fortnights in a year and this amount covers two fortnightly pays). With the bonus of $2,000 added on to this, it amounts to $65,700. The relevant lump sum tax rate would therefore be 31.39 cents in the dollar, even though in previous months, the employee earned substantially less than $2,400 - $2,500 per fortnight.

2 At the time of writing (September 2021), the ACC Earners Levy Maximum was $130,911. This amount can change annually. Review the updated Levy M aximum at https://www.ird.govt.nz/employing-staff/payday-filing/non-standard-filing-of-employment-information/lump-sum-payments/calculatepaye-for-a-lump-sum-payment

Forms to Complete

From April 2019, it is compulsory to file information with the IRD about payroll deductions every payday. Therefore, if you pay staff weekly, you must provide this information to the IRD each week. This is done via an Employer Information Schedule. This schedule identifies each of your employees, and any contractors to which schedular payments were made, and shows all deductions made from their pay.

If you use payroll software, you may be able to file this information direct from your software (if it offers this function). The advantage of this is that there is very little work involved for you. Alternatively, you can file online by uploading a file from your software to the IRD’s ‘myIR’ online service (again, if your software offers this option), or by manually entering details into the ‘myIR’ service. From April 2019, if your annual PAYE deductions are less than $50,000 per year you also have the option of filing paper-based returns (the limit is $100,000 before this date).

In addition, each time PAYE and other deductions are forwarded to the IRD, employers must fill out an Employer Deductions form (IR348/IR349). This form, which can be filed online, shows total deductions for all employees for the period. Unlike the Employer Information Schedule, it does not show details for each individual employee. The IR348/IR349 shows the following amounts for the PAYE period:

• Total PAYE and withholding tax deductions

• Total child support deductions

• Total student loan deductions

• Total KiwiSaver deductions

• Total KiwiSaver employer contributions

• Total Employer Superannuation Contribution Tax (ESCT) deductions. ESCT and KiwiSaver deductions will be discussed next in this part of the seminar.

For most employers, the IR348 form is due once a month on the 20th of the month following the pay period. Businesses that deduct a total of $500,000 or more in PAYE across all of their employees per year are considered ‘large employers’ and need to file the IR349 and make payments twice per month – on the 5th and on the 20th.

KiwiSaver and Employee Superannuation Contribution Taxes (ESCT)

KiwiSaver

Under the KiwiSaver Act 2006, any new employee your business takes on (with some exceptions) has to be automatically enrolled in KiwiSaver, the New Zealand’s Government initiated retirement savings scheme. However, the employee may then choose to ‘opt out’ after being in the job for at least two weeks (but no longer than eight weeks). Your existing employees may choose to ‘opt in’ to KiwiSaver.

For those employees who are part of the KiwiSaver scheme, the Act requires employers to make deductions from employee earnings and then forward these deductions to the IRD to be paid into the employee’s KiwiSaver scheme. Employees (who are part of KiwiSaver) must contribute a minimum of 3% of their gross salary to their KiwiSaver scheme.

Employer Superannuation Contribution Tax (ESCT)

When employers make contributions to an employee’s superannuation fund, these contributions are subject to Employer Superannuation Contribution Tax (ESCT). This means that employees do not receive the full 3% of your contribution into their KiwiSaver account. This is the case regardless of whether the superannuation fund is a KiwiSaver fund or a different type of superannuation fund.

The amount of ESCT to pay depends on the employee’s total annual income including income from superannuation contributions. These rates are shown in Figure 10.

Employers are required to show the total amount of ESCT deductions made each month on their IR348 Employer Deductions form.

Figure 10: Employer Superannuation Contribution Tax Rate

Fringe Benefit Tax

Fringe Benefit Tax (FBT) is a tax on non-cash benefits which employees receive as a result of their employment. Fringe benefits (or ‘perks’) include most benefits given to employees that are in addition to their salary or wages. The intention of FBT is to make sure that non-cash benefits are taxed in the same way as traditional cash benefits such as wages and salaries.

The IRD provides comprehensive examples on the application of FBT.

• IRD, Fringe benefit guide (IR409) – https://www.ird.govt.nz/employing-staff/paying-staff/fringebenefit-tax USEFUL WEBSITE:

Types of Fringe Benefits

The four main groups of fringe benefits are as follows:

1. Motor vehicles

2. Low-interest loans

3. Free, subsidised, or discounted goods and services

4. Employer contributions to sickness, accident, or death benefit funds and specified insurance policies

Gifts, prizes, and other goods are also fringe benefits. If you pay for your employees’ entertainment or private telecommunications use, these benefits may also be liable for fringe benefit tax.

Motor vehicles are the biggest fringe benefit that most businesses supply to employees and there are special rules for calculating FBT on them. Not all business motor vehicles used by employees are liable for FBT – only those that are available for the employee’s private use and enjoyment. This includes travel to and from work. When calculating FBT on motor vehicles, allowances are made for times when the vehicle is being used for work and for when it is unavailable to the employee.

Note that the key point is FBT applies if the vehicle is available for personal use, regardless of whether the employee actually chooses to use it. For example, if you allow an employee to use a vehicle for personal use any day, but they only use it on average 3 to 4 times per week, the benefit exists for all days, not just the days on which it was used.

Benefits not Liable for Fringe Benefit Tax

There are some benefits that are not liable for fringe benefit tax. These include cash remuneration (because these are subject to PAYE), benefits given instead of a non-taxable cash allowance, free board and lodging and some forms of entertainment. It includes distinctive work clothing (uniforms) as well.

There are also some exemptions available on free, subsidised, or discounted goods and services. There is a $300 exemption per employee per quarter for goods and services fringe benefits, provided that the maximum exemption for an employer does not exceed $22,500 per annum for all employees. This means that an employer can provide these types of fringe benefits to employees within these limits, without paying FBT.

Calculating FBT

FBT is charged on the total taxable value of the benefits provided. The taxable value is what the employee would have paid for the benefit in normal circumstances, less anything they have actually paid. For example, if an employer sells an employee goods for $100, when the normal price in the shops is $200, the total taxable value for FBT purposes is $100.

Employers have three options of how they calculate FBT. The simplest option, called the Single Rate Method involves applying a single rate of 63.93% on all benefits provided.

The other two options require you to classify each benefit as either being ‘attributed’ to a particular employee or ‘non-attributed’ (i.e. shared among more than one employee) before calculations are carried out. For the Short Form Alternate Method, the attributed benefits are taxed at 63.93% and the non-attributed benefits are taxed at 49.25%.

The calculations for the third option, the Alternate Method, are a little more complicated, but the benefit of using this method is that fringe benefits are effectively taxed at the employee’s marginal tax rate. That is, they pay the same amount of tax as they would have if they had simply received the cash to the value of the benefits received.

Also, although FBT can work out to be higher than income tax rates, FBT is a tax-deductible expense. Thus, paying FBT will reduce the amount of income tax that you are liable for.

USEFUL WEBSITE:

Examples and tools to help calculate FBT are given on the IRD website.

• IRD, Fringe benefit tax – calculators and worksheets – http://www.ird.govt.nz/calculators/keyword/fbt/.

Filing FBT Returns

All employers who provide fringe benefits must file FBT returns to Inland Revenue either quarterly or annually (or per ‘income year’ – which covers the same period as the end of year tax return).

The return shows fringe benefits provided, calculates the taxable value of the benefit and the amount of FBT payable. If you do provide fringe benefits, you must keep sufficient records to enable the Inland Revenue to verify the fringe benefits provided and their taxable value. Records should include details of the recipient, the occasion and the amount paid.

Discussion Questions:

• Do you use payroll software? If so, what software do you use, and would you recommend it?

• Do you think it is better to offer employees fringe benefits or a higher salary (or wages)? Would it depend on the situation? Why?

Part D: Other Tax-Related Matters

ACC Levies3

In New Zealand, insurance cover for personal injury caused by an accident is provided by the Accident Compensation Corporation (ACC) – refer to their comprehensive website at www.acc.co.nz. ACC cover applies to injuries that happen both within and outside the workplace and is funded through levies that are paid by:

• employers and self-employed people to cover work-related injuries,

• employees and other earners to cover non-work injuries,

• motor vehicle owners and users (through a portion of the cost of registration fees and petrol sales) to cover injuries from motor vehicle accidents, and

• the Government (for injuries for people not in the paid workforce).

The level of each type of levy is set by regulation and may alter from year to year.

Employer Levies

Employers pay levies to provide cover for injuries that happen to themselves and their staff at work or that are work-related. ACC Work Place Cover provides 24-hour, no-fault cover for employees who suffer a ‘work-related personal injury’.

A ‘work-related personal injury’ is an injury that occurs when the employee is:

• at work, or

• having a break from work for a meal or a rest at a place of work, or

• in a vehicle provided by the employer to transport staff to and from work, or

• travelling to or from treatment for a previous work-related personal injury.

The injury can either be due to an accident, or may have happened by a gradual process (e.g. hearing loss), disease, or infection related to the employee’s work.

As an employer, you are legally obliged to give ACC information about your employees and about the nature of your business. In practice, ACC receives this information from Inland Revenue. ACC will automatically calculate your levies and invoice you for them. Your levy will depend on your business industry code. You can find out your business industry code from the Business Industry Description Website (www.businessdescription.co.nz). ACC uses business industry codes to group businesses with similar levels of risk together into ‘classification units’ and then sets levies for each of these classification units.

If a particular industry has a high rate of injuries (such as employees working with heavy machinery), the levies will be higher than for an industry with a low injury rate (such as office workers). However, ACC also provides ways for employers to reduce the levies they pay. For example, under the ‘experience rating’ system, a discount will apply if your business has had a good claims history for the previous three years.

Employer invoicing by ACC occurs once a year, usually around July or August, and is based on employee earnings for the year ended 31 March. The IRD provides ACC with relevant earnings data from employer monthly schedules to calculate levies.

3 Note that information about ACC is covered in-depth in the Workplace Safety seminar.

You can use a calculator on the ACC website to estimate the amount of ACC workplace levies for your business.

• ACC, Calculating your levies – https://www.acc.co.nz/for-business/received-an-invoice/calculateyour-levies/

Employee Levies

All employees pay an ACC levy to cover themselves for injuries that occur outside of work. The earners’ levy is charged at a flat rate. From 1 April 2021 to 31 March 2022, this rate was $1.39 (including GST) per hundred dollars earned. To check the current rate, visit https://www.ird.govt.nz/income-tax/income-tax-for-individuals/acc-clientsand-carers/acc-earners-levy-rates

There is no need for employers to make a separate calculation as the earner levy is included as part of the deduction rates shown in the PAYE tables. ACC is only charged on earnings up to a certain level, called the ‘earnings threshold’, which tends to increase slightly in each tax year. For the 2021/2022 tax year the threshold was $130,911. Earnings over this amount are only subject to PAYE – this is reflected in the PAYE tables.

Self-Employed

ACC defines self-employed people as working for yourself and responsible for paying your own tax.4 Basically, it is those people who do not take wages from their business, and therefore do not pay the earners’ levy (for nonwork personal injuries) through the PAYE system. People who are self-employed pay a combined ACC levy which includes the earners’ levy and a self-employed work account levy for work-related personal injuries.

Penalties and Offences under Tax Legislation

Penalties are attached to all areas of tax! There are penalties for filing returns late and there are penalties if you get it wrong or do not pay what you should, when you should. Furthermore, if you get it wrong and do not pay enough tax, you will be charged interest on what you owe, including on any penalties, for the amount of time it has been outstanding. If matters get very serious, you may even be prosecuted and criminal penalties may apply.

An overview of the different types of penalties and of circumstances when they may apply is given below. For further information on interest and penalties, refer to the IRD booklet ‘Penalties and Interest’ (IR240) available at https://www.ird.govt.nz/managing-my-tax/penalties-and-interest/penalties-and-debt.

Types of Penalties

The main kinds of charges for failing to meet tax obligations are:

• Shortfall penalties (the correct amount of tax is higher than the amount you paid – this includes defaults in paying employer deductions such as PAYE).

• Late payment penalties (payment is received by the IRD after the due date).

• Late filing penalties (the tax return is not filed by the due date).

• Criminal penalties.

If any type of tax payment is not made on time, the IRD will charge an initial 1% late payment penalty on the day after the due date. A further 4% penalty will be charged if there is still an amount of unpaid tax (including penalties) at the end of the 7th day from the due date. Every month the amount owing remains unpaid, a further 1% incremental penalty will be added. However, penalties are not charged on unpaid amounts under $100.

4 Accident Compensation Corporation. (2017).

Use of Money Interest

As mentioned above, if you do not pay your tax on time, you will be charged interest (as well as penalties). You will also be charged interest if you use the estimation option for paying provisional tax, and underestimate the amount of tax to pay.

On the other hand, if you overpay your taxes and the IRD owes you money, the IRD will pay you interest on the amount owing. The rate that the IRD charges you if you underpay is linked to short-term market borrowing rates, whereas the rate that they pay you (if you overpay) is linked to short-term market deposit rates. Thus, the interest rates the IRD will pay you is much less than the interest rate that will be applied to any money you owe them. As of September 2021, the current rates were 7.0% (for underpaid tax) and 0% (for overpaid tax).5

It is important that new business owners understand just how easy it is to get into a situation in which they are liable for this interest – particularly when it comes to provisional tax.

Example: Company Provisional Tax

Kahu and Anika run ‘Koru Events’ – a family owned event planning and management company. This business regularly earned a profit of around $50,000 - $55,000 each year for the past five years. The maximum income tax that this business expects to pay each year is therefore $15,400 (i.e. 28% of $55,000). The directors have chosen to use the estimation option for paying provisional tax and, to be on the safe side, they regularly pay provisional tax of $6,000 per instalment. As there are three instalments per financial year (August, January and the following May), this is equal to a total of $18,000 in tax that the company usually pays. Since this is more than is needed, the business receives a small amount of interest on the overpaid tax.

However, in February of the most recent financial year, the company unexpectedly gained a contract to plan an event worth an extra $20,000 in profit. This meant Koru Events had a total profit of $75,000 and should have paid $21,000 in provisional tax throughout the year. This would have equalled 3 instalments of $7,000 (instead of the 3 instalments of $6,000 which was actually paid). The company is therefore liable for interest dating back to the $1,000 underpaid on 28th August, as well as a further $1,000 underpaid in January.

The company directors are extremely frustrated because, back in August and January, they had absolutely no idea that this sale was even a possibility, yet they are now being penalised! On reviewing their options, they decide it is better to start using the Accounting Income Method (AIM) for paying provisional tax as it is more accurate, and use-of-money interest will not apply if payments are made on time.

HEI TAUIRA:

Types of Fault for Which Penalties Apply

There are five categories of fault regarding tax obligations, each carrying a standard penalty as a percentage of the tax shortfall:

1. Lack of reasonable care: 20%. Reasonable care means having adequate recordkeeping systems and procedures to ensure that income and expenditure are properly recorded for tax purposes. If you rely on professional advice, you will usually be deemed to have taken reasonable care (unless, for example, you are careless in the information you supply the professional).

2. Unacceptable interpretation of the law: 20%. This penalty applies if you incorrectly interpret the law and therefore do not fulfil your tax requirements. However, your interpretation must be one to which a court would give serious consideration, but not necessarily agree with.

3. Gross carelessness: 40%. This is behaviour that demonstrates a high degree of carelessness and disregard for the consequences.

4. Adopting an abusive tax position: 20%. This is a penalty that is intended to deter taxpayers from entering into arrangements for the main purpose of avoiding tax.

5. Evasion: 150%. Tax evasion includes actions such is deliberately avoiding paying tax owing. It may incur a criminal penalty of imprisonment for up to five years and / or a fine of up to $50,000.

Grace Periods

The IRD provides everyone with one ‘grace period’ for late payment penalties. This policy recognises that even people who usually file on time may occasionally miss a payment due date. Thus, the first time you miss a due date, you may be given a further month (from the issue date of the grace period letter that you will receive from the IRD) to pay overdue amounts before any late payment penalties are charged. If you do not make payment within this time, late payment penalties are charged from the original due date.

If you use your one grace period, you will become eligible for another one if you consistently pay on time for the next two years.

Record-Keeping

Every person who runs a business in New Zealand is required by law to keep thorough and accurate records. With respect to tax, you need to keep sufficient records to:

• show the business’s income and expenses,

• confirm your accounts,

• calculate your various tax liabilities (such as GST), and

• show the business’s assets and liabilities.

You must keep all records for 7 years and your records must be in English (unless prior approval is sought from the IRD). In addition, your records must be stored in New Zealand. This means that, if your records are stored online (perhaps because you use an online accounting software package or because you keep electronic records that are in a cloud storage facility) you need to ensure that the data is actually stored in New Zealand – some cloud computing providers actually store information offshore. Your records may only be stored overseas if the IRD has authorised you to do so or because the offshore storage provider that you use has been authorised by the IRD to hold records for New Zealand businesses.

Here is a broad outline of records that IRD requires all businesses to keep6

• Core records such as cashbooks, petty cashbooks, and creditors’ and debtors’ list

• Income records such as invoices, credit card sales, debit and credit card notes

• Expense record such as invoices for purchases, receipts for credit card purchases

• Banking record such as cheque and deposit books, bank and credit card statements, and interest statements

• Worksheet record such as tax return calculations, vehicle logbook calculations, and home office calculations

• Asset register record such as depreciation schedule and calculations

• Financial accounts records such as balance sheet, and final profit and loss statements

• List of assets and liabilities

• Dividend statements

• Legal documents such as, sales and purchase agreement, lease agreement, and credit agreements

Records you should keep if you

• Employ staff

• Wage book for all PAYE, Kiwisaver, student loan, and child support deductions

• Employment agreements

• Use a cash register

• Till tapes and reconciliations

• Day books

• Register for GST

• Tax invoice

• Other invoices

• Offer fringe benefits

• Full record of any benefits such as entertainment expenses, free or discounted goods and services

6 Inland Revenue Department. (June 2019)

• Keep stock

• Stock records

ƒ Manual system – stock card, regular inventories

ƒ Computer system – record of all stock movements, link to POS, if possible

• Regular stock-take forms

• Use accounting software

• Regular back-ups off-site

• Software manuals

• Use a home office

• Records relating to home costs such as insurance, rates, power, phone, maintenance costs

• Use a private vehicle for business

• Full records of vehicle running costs such as vehicle logbook

The IRD conducts audits of business records to ensure that businesses have paid the correct amount of tax. Audits can be triggered at random or as a result of an unusual event such as discrepancies in your returns or a ‘tip off’ from someone else. At times, the IRD may also focus on auditing businesses within a particular industry. This is one reason why record-keeping is so important.

Aside from keeping the IRD happy, there are a number of benefits for a business in maintaining accurate records. These include:

• Better control of your business, as good records help you keep track of income and expenses.

• Easier access to finance from banks or other lenders.

• Getting a better selling price for your business due to having transparent records (if you intend to sell your business).

• Savings in accountancy fees (by saving time for your accountant).

• A quicker and less stressful process if you are audited.

Discussion Questions:

• What are some ways in which you could reduce ACC levies for your business?

• Why do you think the IRD only pays interest at 0% if you overpay your tax, yet charges 7.0% if you underpay?

References

Accident Compensation Corporation. (2021). Cover for Self Employed. https://www.acc.co.nz/for-business/ choosing-the-best-cover-option/types-of-cover-for-self-employed/?smooth-scroll=content-after-navs

Aotahi Limited. (2008). Taking Care of Business: Entrepreneurship in Aotearoa (2nd Edition). Te Kuiti, New Zealand: Author.

Business.govt.nz (n.d.). Claiming expenses https://www.business.govt.nz/tax-and-accounting/reducing-your-tax/ claiming-expenses/

Inland Revenue Department (2021). Choose to become a look-through company https://www.ird.govt.nz/incometax/income-tax-for-businesses-and-organisations/income-tax-for-companies/look-through-companies/ becoming-a-look-through-company/choose-to-become-a-look-through-company

Inland Revenue Department. (2021). Depreciation Methods. https://www.ird.govt.nz/income-tax/income-tax-forbusinesses-and-organisations/types-of-business-expenses/depreciation/claiming-depreciation

Inland Revenue Department. (2021). Double Tax Agreement (DTAs). https://www.ird.govt.nz/international-tax/ double-tax-agreements

Inland Revenue Department (2021). Fringe Benefit Tax Rates https://www.ird.govt.nz/employing-staff/payingstaff/fringe-benefit-tax/fringe-benefit-tax-rates

Inland Revenue Department (2021). Penalties and Interest. https://www.ird.govt.nz/-/media/ project/ir/home/documents/forms-and-guides/ir200---ir299/ir240/ir240-2020. pdf?modified=20200624205346&modified=20200624205346

Inland Revenue Department. (2021). Running a Business: Keeping Records https://www.ird.govt.nz/managing-mytax/record-keeping

Inland Revenue Department. (2021). Resident Withholding Tax. https://www.ird.govt.nz/income-tax/withholdingtaxes/resident-withholding-tax-rwt

Inland Revenue Department (2021). Shortfall Penalties. https://www.ird.govt.nz/managing-my-tax/penalties-andinterest/penalties-and-debt/shortfall-penalties

Inland Revenue Department. (2010). Trading Trusts. http://www.ird.govt.nz/yoursituation-bus/bus-aust-nz/typesbus/tradingtrusts/

Disclaimer

The information in this publication is not intended as a substitute for professional advice. Te Wānanga o Aotearoa expressly disclaims all liability to any person / organisation arising directly or indirectly from the use of or reliance on, or for any errors or omissions in, the information in this publication, including any references to third parties. Whilst efforts have been made by Te Wānanga o Aotearoa to ensure the accuracy of the information provided, the adoption and application of this information is at the reader’s discretion and is his or her sole responsibility.

Copyright © Te Wānanga o Aotearoa, 2018. All rights reserved. No part of this material may be reproduced or copied in any form or by any means (graphic, electronic or mechanical, including photocopying, recording, taping or information retrieval systems) without the prior permission of Te Wānanga o Aotearoa. For further information and contact details refer to www.twoa.ac.nz

This publication was revised in October 2021.

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