Legitimate ways to keep the tax man at bay
Tax time is looming. If you own one of New Zealand's 46,000 plus businesses then you'll be thinking how to slash what you pay while maximising your claims - legitimately of course.
While IRD's website has a ton of information, experts say some business owners still don't fully understand the ins and outs of tax returns, claiming expenses, and what tax they need to pay.
As this year's tax season draws closer (July 7 so you have just under two months) and you're tossing up whether to wade through your business accounts alone or ask for help, here are nine tips to making your tax return a less painful experience:
1. It's hard to get a break
In the current squeeze business owners are looking to take advantage of any chance to hold on to a penny or two. However there are few tax breaks out there for small businesses.
Auckland-based tax specialist, and director of Baucher Consulting, Terry Baucher says New Zealand always ranks highly for its ease of business.
"The trade off is there's nothing in the system to help small businesses with their tax," he said.
Employment consultancy business owner Max Whitehead agrees it is a breeze to start up a small business in New Zealand, but it "catches up with you", he says.
Self-employed for 12 years, Whitehead says most businesses in New Zealand are small enterprises yet tax laws are geared towards big businesses.
He'd prefer a flat tax to make things easier. However, if you are GST registered and earn between $2500 and $150,000 a year, you may be eligible for a discount on your provisional tax.
Provisional tax is when you pay your income tax in instalments throughout the year.
A break down of these tax breaks is on the IRD website but be warned while thorough, it's no easy read.
2. Claiming expenses
If there aren't many tax breaks set up for small businesses, how can owners benefit, or at least not constantly find themselves in the red?
Nearly every business has expenses, and most of these can be deducted before arriving at the taxable income. Not all business owners know what they are eligible to claim, Baucher says.
As a business owner the biggest expense you can claim is the cost of using your home for the business. A portion, usually 50 per cent, of rent, mortgage interest, electricity, and maintenance can be claimed. Plus you can consider vehicle and travel expenses for work along with your telecommunication bills - landline, mobile and internet charges.
JMV Chartered Accountants director David Stacey says people should be realistic when claiming expenses though he admits the IRD rarely investigates or challenges any small business expense claims.
"‘I've seen people claim from $2000 or $3000 up to $7000."
The IRD's rundown on what you can claim.
3. If in doubt, hire an expert
Tax experts recommend hiring an expert to help with your tax - go figure.
But self-serving motives aside, they can not only save you being bored to death, but also ensure you get the full entitlement you're due.
Baucher suggests using an agency recognised by IRD such as the Accountants and Tax Agents' Institute of New Zealand (ATAINZ), the New Zealand Institute of Chartered Accountants, or Certified Public Accountants so you have a proper process to follow if unhappy with the service you receive.
Don't forget, you alone are liable for any errors in your tax returns, or payments, even if you hire an expert.
Stacey says although taxes are complicated and the laws are always changing, many Kiwi business owners don't hire a tax agent or accountant because of their do-it-yourself attitude.
Whitehead tried to do his own taxes for two years when he started out alone, but was hit with a big tax bill and penalties of about $1500 after he made a few mistakes.
The more he looked into his taxes with an accountant, the more he realised the extent of his naivety.
4. Don't be late
If you are doing your own tax returns you'll need to have them to the IRD by July 7. But get in quick if you have any queries, Baucher says, before the phones start jamming.
If you use an agent you have until March 2014 to get your return in for the 2013 financial year. But you will be pinged with an automatic late filing fee of $50 if you don't get it in in time.
Same thing goes with anything you might owe the taxman.
If you are going it alone, you need to have your tax payment into the IRD by February 7 2014; using an agent gives you a little more leeway until April 7.
To file a tax return you'll need copies of bank statements, net income, depreciation of assets such as computer or car, phone bills, travel expenses, what is owed to you, and what you owe others, Stacey said. You can get all of the necessary IR3 forms from IRD.
5. Try accounting software
If you are feeling confident in your business and accounting acumen, but not quite ready to go it alone you have a third option: online accounting packages such as Xero, MYOB, or Banklink.
In the case of Banklink, the programme uses your bank account information to gather all the data it needs.
Whitehead uses accounting software, which he says is useful but time consuming and still needs to be used in conjunction with an expert.
6. Get value for money from your tax expert
So you've decided to hire a tax adviser, how much damage is this going to do to your wallet?
Ernst & Young tax partner Jo Doolan says you could be looking at more than $1000 for an adviser to file your tax returns and check through everything.
But often your adviser justifies their fee by adding to the expenses claimed, minimising the risk, and most importantly, taking away the headache for you.
"If you are not getting value for that then you should be looking somewhere else," Doolan says.
Stacey says the fee can depend on the state of your records and the number of transactions, but upwards of $800 was typical.
If the Profit & Loss account is given to the expert, the tax return alone will be around $400.
Whitehead knows he needs to hire professionals, but says the fees quickly add up. He pays for an accountant, a book keeper, and a debt collector, which sets him back about $7000 a year.
If you're think this all seems expensive, don't forget the fee charged by your agent or accountant can also be claimed as a business expense. Rest assured, they will tell you that.
7. Keep on top of things
Baucher's messages to small businesses is keep on top of your cash flow, use accounting systems and advisers and pay your tax on time.
It's tempting in your first year or so of business to use money that should go on tax payments to fund the business, but after the first year you'll be stuck with enormous penalty fees. And then it becomes easy to fall even further behind on your payments. The New Zealand government is owed $7.8 billion in overdue tax.
"Borrowing money from the IRD is the most expensive money you can borrow," he says.
8. Compare yourself to others
Statistics NZ and IRD have begun publishing benchmarks, such as gross profit ratio, for a number of industries. It's an ideal tool for a small business to see how they are doing relative to others, and it's a warning sign if your business is under-performing the benchmark.
It's also a handy signal for the IRD that under declaration of income is happening, Baucher says.
Learn more about industry benchmarking.
9. Write it down
Another potential danger for small businesses owners is that they keep all of their information about their companies in their heads rather than written down or with other staff, Doolan says.
"When something is challenged, what might be factually claimable becomes hearsay, and not able to be claimed. It's about crossing your t's and dotting your i's," she said.
"Unfortunately, it's not in the Kiwi psyche to do that. In New Zealand entrepreneurs live their business, so it's hard to draw the line between the two."