Ah, tax time. It sneaks up on us every year.
And whether you’re a new small business or an established company, you’ve probably got a few questions. Like, how to prepare tax returns? What’s involved? What can I claim? And how do I make it a stress-free process?
Well first things first, mark down March 31st in your diary – the end of the New Zealand financial year.
Now, let’s jump in.
The Three Main Types of Business Taxes
Goods and Services Tax (GST) is the tax that you add to your prices when your turnover is likely to be more than $60,000 in a 12-month period. In saying that, many business owners choose to register for GST even if they’re under the threshold. Your GST is to be sent to the government at specified times. In New Zealand, you can register for 1, 2 or 6 month GST periods.
As the name suggests, this is the income you have to pay tax on. This is done once the tax year is over (in New Zealand, this is the 31st of March). Income tax will take into account all of your income and expenses, and you’re expected to pay this on time. This article focusses on income tax (so more on this in a minute).
Taxes related to employees
If you’re a sole trader, skip this section. But if you employ staff, it’s expected that you register with Inland Revenue and deduct Pay As You Earn (PAYE) taxes from your employees’ wages.
How to Prepare Tax Returns for Small Business
Many small business owners choose to file their own income tax. And if this is you, there are a couple of things you must know before you begin. On the other hand, if you outsource to an accountant or tax agent, this guide will help you make sure they’re doing a great job.
11 Steps to Prepare Your Tax Return New Zealand
1. Register for Inland Revenue
Gone are the days of filing tax returns using pen and paper. Thankfully, it’s all done online now. For New Zealand tax returns, you must register for MyIR on the Inland Revenue website. If you’re already registered for MyIr, log on to check your details are still up to date.
2. Make sure you have your NZBN and IRD
Your IRD is a number assigned to you once you register for Inland Revenue. An NZBN stands for New Zealand Business Number, and every business owner should have one. If you’re just starting out, apply for an NZBN here.
3. Keep relevant documents handy
It’s important you keep all your relevant documents in a safe place. That way, when you need to enter in your health insurance details, spouse details, business expenses and bank account details – you’ll know exactly where to find them.
4. Consider the COVID-19 subsidy
As part of the response to COVID-19, the New Zealand government offered a wage subsidy to any businesses that were directly affected. If this is you, you’ll need to declare this in your income tax return.
5. Set aside tax payments throughout the year
Whatever you do, don’t skip this step.
If you fail to set aside income tax payments throughout the year, you’ll get a rude shock when March 31st rolls around. And nobody wants to be left scrambling for money at the last minute to pay their bill! We recommend putting aside 20 – 25% of each paycheck into a separate account. And it’s a good idea to choose a high-interest account if you can.
6. Summarise all transactions
Now it’s time for the nitty-gritty. You’ll need to summarise all income and expenses on a platform of your choice. Google spreadsheets or Excel is a cost-effective option. But for more advanced accounting software, we recommend using Xero.
When you use Xero, details about your income and expenses will transfer straight from your business account to your books – saving you a whole lot of time and stress.
And remember, you’re legally required to keep records for at least 7 years. Keeping records is simple when you use a cloud-based platform.
7. Know the rules for tax deductions
There are items that you can and can’t claim as a business expense. You can often claim things like home office expenses, tax agent’s fees and depreciation. It’s important to know exactly how much you can claim of these items.
Knowing what you can and can’t claim is vital to a successful tax time. You don’t want to pay too much tax because you skipped over a few big expenses. But you also don’t want to pay too little and land a hefty fine! This is why so many small business owners choose to work with an accountant (more on that in a minute).
8. Review your year
Tax time is a good time to reflect on the previous 12 months. Look at your spending versus your income, and check whether this was in line with your financial goals. Did you stay on budget or go over? Did you reach your financial goals? What are the areas you can improve on? Answering these questions will help you set goals for the upcoming year.
9. Check your superannuation contributions
Did you know that you can claim a tax deduction for your super contributions? So, make sure you include these in your income tax return. Tax time is also a chance to plan for any additional contributions you want to make in the next financial year.
10. File on time
In New Zealand, your tax return needs to be filed by July 7th. If you miss this date, you may be charged extra fees. If you have a tax agent, this deadline can be extended.
11. Hire a small business accountant or tax agent
If you’re still feeling overwhelmed by tax time, it’s a great idea to hire an accountant. In the long run, they will save you time and money. Plus, they will know the ins-and-outs of what you can and can’t claim, so you can avoid any mishaps along the way. If you use an accountant, you may also be granted an extension to lodge your return after July 7th.
Need Help to Prepare for your Business Income Tax?
At CFO Babe, we help tidy up your books, record transactions and streamline your accounts. In other words, we’ll help get all your paperwork in a neat little package so you or your accountant can file your taxes with ease.