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A mate advised me I don’t have to pay tax in my first year – is that correct?

Yes and no. If it is your first year in business you may not have to pay provisional tax but you will eventually have to pay tax if you make a profit in your first year. There is no “tax holiday” in your first year.

Talk to us as soon as you are thinking about operating a business or becoming self-employed as you should start putting funds aside for tax from day one if you are expecting to make a profit.

Do I need to be GST registered?

You must register for GST if you carry out a taxable activity and if your turnover:

  • was over $60,000 for the last 12 months, or
  • is expected to go over $60,000 for the next 12 months (this equates to $5,000 per month. If your turnover is $5,000 per month and you expect to maintain that level all year, you'll need to register for GST); or
  • was less than $60,000, but you include GST in your prices, for example taxi drivers who have included 15% in their taxi fares.

You can choose to register for GST even if your annual turnover it less than $60,000. This is referred to as voluntary registration.

Remember, turnover is your total sales and is before any expenses. It is not your profit figure.

Do I need to pay provisional tax?

If you had Residual Income Tax of $2,500 or more in your last income tax return (any entity) you may have to pay provisional tax for the following year.

Even though you may not be required to pay provisional tax based on your previous year you may want to voluntarily make payments to minimise any interest Inland Revenue may charge. Talk to us early if you are new in business.

How can an investment property that runs at a loss be a “good” investment?

Currently there’s no capital gains tax on rental properties that are held for long-term rental.

Although the expenses in a given period may exceed the rent received, the capital gain may make up for the shortfall turning what may look like a poor investment decision into a good one.

We know property very well so talk to us if you are buying or selling and need advice around structure, financing, tax or GST issues.

How can I reduce Use of Money Interest (UOMI) and penalties charged by IRD?

We recommend you consult your advisor and review your year to date earnings before each provisional tax instalment to ensure you are paying enough tax. Paying a little more now will ensure you meet your tax obligations for the year, help with your budgeting and reduce any UOMI expense which may be charged.

If you find you have underpaid tax or missed a tax payment deadline you could also look to complete a tax purchase which can result in significant interest savings and may also eliminate penalties. Talk to us to find out more.

If I have made a profit where’s the cash?

This could be for a number of reasons, with the most common being funds tied up in working capital (e.g. accounts receivable) or funds used for purchases that do not appear in the expenses of the business.

The main examples are:

  • Purchases of fixed assets such as property or equipment;
  • Repayment of principal on bank loans; or
  • Drawings made by the shareholder

If I’m paying tax you’re not doing your job as my accountant?

Paying tax is a sign that your business is profitable.

We will help you minimise tax but only in a legitimate way. We will make sure that we structure your business in the most tax effective way and claim every legitimate expense that you can.

We want to know that if IRD audits your business, you will come through with flying colours.

In bookkeeping, why are revenues credits?

In bookkeeping, revenues are credits because revenues cause owner’s equity or stockholders’ equity to increase.

The accounting equation, Assets = Liabilities + Owner’s Equity, must always be in balance. The asset accounts are expected to have debit balances, while the liability and owner’s equity accounts are expected to have credit balances. Therefore, when a company earns revenues, it will debit an asset account (such as Accounts Receivable) and will need to credit another account such as Revenues.

The credit balance in Revenues will eventually be moved to the sole proprietor’s capital account or to a company’s Retained Earnings account (thereby increasing the credit balance in one of those owner’s or shareholders’ equity accounts)

Is there a limit on donations I can claim?

The donations rebate is limited to your net income, ie: $50k of income = $50k of donations claim, no income = no donations rebate.

What do I need to do to help me avoid an investigation and to ensure that if I have an investigation, then I will have no worries?

  • Firstly, employ the services of a qualified accountant.
  • Always keep your bookkeeping up to date and try not to use the company account to pay personal expenses. Also don't be tempted to "borrow" money from your company.
  • Don't be tempted to round up your expense allowances, always be honest when recording your expenses.
  • Ensure your company and personal returns are submitted to the relevant authorities by the due date.
  • Minute directors meetings where dividends are resolved and never back-date documents.
  • Don't delay income recognition into a future year by delaying the issuing of invoices.

What expenses can I claim for tax purposes?

If you are in business the general rule is that if there is a nexus (or closeness) between the expense you are claiming and the income you are generating you are entitled to claim it.

For example advertising your business would be a deductible expenditure.

Please contact us for a list of common deductible expenses.

If you are a PAYE employee you are limited to what expenses you can claim. The most common ones will be income protection insurance and accounting fees.

What is a shareholder current account?

A shareholder current account is a record of personal funds advanced to a company and company funds withdrawn by the shareholder from the company. The balance is either what the shareholder owes to the company (a debit balance) or funds the company owes to the shareholder (a credit balance).

It also records expenses paid by the company on behalf of the shareholder or expenses paid by the shareholder on behalf of the company. It may also record a net dividend or salary owing to a shareholder.

A shareholder current account usually only shows in closely held companies as larger organisations have policies in place not to mix business and personal transactions.

What is depreciation recovered?

If you sell a previously depreciated asset for more than its book value there will be depreciation recovered. Depreciation recovered is the difference between the sale price and the book value, tax is payable on this amount. It is capped at the total depreciation claimed on the asset.

The most common time there is depreciation recovered is on the sale of a previously depreciated rental property.

What is provisional tax?

Provisional tax payments are either voluntary or compulsory advance instalments of tax paid throughout the year. The instalments are either based on your prior year earnings or your expected earnings for the income tax year. As they are paid in instalments rather than a lump sum they are easier on cashflow.

What is the difference between payments and invoice basis for GST?

Payments basis: GST is accounted for in the period where the payment is made or received.

Invoice basis: GST is accounted for when you receive or issue an invoice OR receive or make a payment (whatever comes first).

What number of shares should my company have?

The shareholding of the company will affect the split of any dividends you declare. The dividends are paid in direct proportion to the number of shares held by each shareholder.

Anyone can be a shareholder and they don't have to be an officer of the company. We can advise the best structure for asset protection and tax minimisation.

For small companies 120 shares (instead of 100) is a good option as it divides by 1, 2, 3, 4, 5, 6, 8, 10 and 12 in case you want to add shareholders later. For larger numbers of shares just add some zeroes – e.g. 1,200 or 12,000.

When is my tax return due?

For a normal 31 March balance date (like most taxpayers) when you use a tax agent you have an extension of time to file your tax return to the 31st March following the tax year ended. If you don’t use a tax agent you only have until 7 July (i.e. in the same year as the period ended 31 March).

Please note if you are late filing your tax return you will lose the extension of time.