Big IdeasHow To Reduce Your Company's Tax Bill
27 April 2018
As a small business in New Zealand, we bet you’d like to make savings any way you legitimately can. Here’s one – tax. Check out these tips that could help reduce the amount you owe.
Interest or penalties will quickly add to the total if you don’t file and pay on time. Even worse, the penalty could become MORE than what you owed in tax!
Many of the costs involved in running a business can be claimed; and if you work from home, some of your household expenses too. To keep everything as clear and simple as possible, and to ensure there’s a paper or electronic record, try to exclusively use your business account to pay for your business related costs. Expenses are claimed as part of your income tax and GST returns and while you don’t need to provide the receipts at this point, should the IRD want to see them you must have them available.
Not all business costs are tax deductible and some are deducted over time (e.g. depreciation on an asset) but for the most part, it is as simple as ‘anything you’ve had to spend money on to run the business’.
Where this can be tricky is with vehicles, entertainment, travel, and other expenses that are partly business related and partly private.
If a vehicle is used strictly for business (and we do mean strictly) you may claim full running costs. However, if it is your own vehicle that is also used for business, you can only claim on the portion that is business use. The expense amount is calculated by using either an ‘actual cost method‘ or a ‘kilometre rate’ method. Keeping a detailed logbook complete with distances, dates and reason for travel is a common method for determining the ‘business use’ that can be deducted as an expense. Please note in the absence of a logbook (or actual records) business-use expenses are limited to 25% of actual costs when it comes to vehicles – that’s assuming 25% is justified.
Where a company vehicle is available for personal use by an employee, you will need to consider fringe benefit tax (FBT). For sole traders and partners in a partnership, rather than paying FBT, you’ll need to make income tax and GST adjustments for private use.
When it comes to travel expenses, only claim the business portion of the trip mixed work and personal time. Entertainment expenses can be 50% or 100% deductible depending on the details, so make sure you get in touch if you are uncertain and we can talk you through it.
For more details on valid expenses, check out this helpful video from IRD New Zealand.
Minimising your tax is a byproduct of having the right business structure and implementing good business practices in general. One of the essentials is keeping good, thorough, easy to read, well-organised records. The benefits of this are massive:
• Better control – Confidence in your records and knowing if you’re making enough money to meet expenses and make a profit helps you in budgeting and decision making.
• Timely decisions - you simply cannot afford to wait until the end of the financial year to find out if your business is making or losing money. Regularly update your records to identify issues and make timely interventions.
• Managing your cash flow - businesses that regularly update their records have a clearer and more accurate view of their flow of money in and out, meaning they can plan for things like seasonal downturn and when it’s best to invest in business assets.
• Lower accounting costs – well-ordered records mean it will be easier for your accountant or business advisor to provide meaningful insight and quicker to prepare your financial reports and tax returns.
• Increase funding opportunities – If you’re seeking capital, good record keeping makes it easier to see if your business is a risk or good investment.
• Better sale prospects – a well-organised business is much more attractive to potential buyers and an important factor in maximising value.
Starting out? If you’re looking to become self-employed or start a new business and it’s close to the end of the tax year (March 31st), consider waiting until the new tax year to save on paperwork.
In your first year? Voluntarily pay tax before the end of the tax year in your first year of business and you might get a discount (currently 6.7% if you meet the criteria).
Made charitable donations? Good on you! Keep all the tax receipts for donations you make over $5 so that you can claim tax credits on the donation (the lesser of 33% of the donation or 33% of your taxable income).
Don’t overpay your tax. Tax refunds may include interest but it’s a lower rate than you’ll get if that money was in a savings account or productively employed elsewhere.
Paying tax is important and it is a sign that you are making a profit, the key is to make sure that your business pays no less and no more than it has to - a fair share. We’ll ensure that you are set up in the right structure and we specialise in providing accurate and efficient taxation services by using the technology that ultimately aims to drive your business towards an ideal and better future.Back to Big Ideas