For IRD, Filing and Paying on time are essential. Good Record Keeping is important to support your tax position to IRD. Planning and Budgeting for taxes can come into play.
Business structures
Sole Trader
A sole trader can file and use his/her personal IRD number for the business. The income tax and GST returns of a sole proprietorship business will use the personal IRD number. Personal assets of an individual can become opened up to IRD, in case of tax default, as if to creditors. A sole proprietor files an IR3, for the profit received from the business.
Company
A company has a nonindividual IRD number. This number can be used for providing Employment Information to IRD. Imputation credits and fringe benefit information can all be supplied with this Company IRD. A company can transfer its profits as shareholder salary, thereby giving a choice of a lesser different tax rate. A company files an IR4.
Partnerships
Partnerships, also have a nonindividual IRD number. Partnerships will not pay Income tax but these are passed out to the partners. Partnerships file an IR7(which is for partnerships and Look through companies).
A company is a legal entity by itself whereas a partnership is a written agreement where partners are usually jointly and severally liable. Jointly and Severally liable means if one partner disappears, the other partner will then be responsible for all the liabilities. Sole proprietorships cannot have trade names while partnerships and companies can.
Record Keeping
Receipts and Invoices(issued and received), bank statements(for payments made and received) and travel expense details( log book), and keeping worksheets showing tax return calculations are all good record-keeping practices. The record has to be kept for 7 years. IRD has got templates for Invoices, Credit Notes, etc. Searching the IRD websites requires the use of good keywords.
Business expenses
These can be revenue expenses, Capital expenses, and non -deductible expenses. Non -deductible expenses are those which can't be claimed, which include fines, penalties, company registration fees, etc. Assets over $1000 are usually considered by the IRD to be capital expenses that can be written down by depreciation. Setting up the business and the cost of upskilling are both considered business expenses.
Vehicle expenses
A logbook can be used to record the kilometers traveled. The actual expenses can be claimed or a kilometer rate specified by IRD can be used. If a log book is not used, up to 25% of the vehicle expenses can be claimed. The method to be used depends on a cost-benefit analysis.
Home office
The actual rate or square meter rate can be used for deductions. The actual rates can include, rent, power, house Insurance and mortgage interest(not mortgage principle), rates, and contents insurance. The deductions for business usage of private internet connections should be reasonable. It is typical to use 50% of the telephone and internet expenses as deductions for home office use.
Travel and Accommodation expense deductions would need a record of the itinerary; if the itinerary contains a private visit, this would require an expense adjustment.
Other matters
IRD sends the required information to ACC. For Salary & Wages paid, the deduction is for gross salary and wages. Highlighting lines in Receipts and writing on the back of the receipt are effective record-keeping techniques. It is the rule of thumb that expenses under $50 require a receipt only.
A business needs to pay tax on its net profit, which is its taxable income. This occurs after the end of the year. If the business is GST registered, the GST component can be taken out from the taxable income, because GST is separately filled. If a business becomes GST registered halfway through, the split has to be accounted for properly. That taxable income would then contain two parts, with and without the GST component.
Provisional tax
Provisional tax is a way of paying income tax as you go. It is business income tax paid differently. It is applicable if the tax bill is over $5000 in a year. There are four options to pay the provisional tax. The standard option is based on previous years' Residual income tax plus five percent. The estimation option can be used to estimate the income but underestimation can result in user money interest. Tax agents have different filing periods.
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