Learn how to work out how much to put aside and different methods for paying tax
Don’t let it be a surprise. Plan for it – here’s how…
Ist year of business?
You need to know how much profit you are making. Record your assessable income and deductible expenses and then run your profit and loss report. If you’re making a profit you should put 20% of the profit figure in your income tax savings account and leave it there! Get us to create or check your profit and loss report and calculations if you’re not sure. Repeat for each month or run your year to the end of last month and top up your tax account so that 20% of your year to date profit is sitting there giving you peace of mind that you’ve got it covered.
After year end, we’ll send you our online questionnaire to ensure we have all the information we need to finalise your financial reports and tax return. We’ll make sure you claim everything you are entitled to – paying tax is a good thing but paying more than you have to is a luxury a lot of us cannot afford!
If your end of year tax bill is more than $2500 you’ll have to pay instalments of your next year’s tax on certain dates during the year – so just as well you’ve been practising putting your tax aside because this year you’ll have to send it to IRD sooner. For more information see ‘Been in business for a while’
Been in business for a while?
Hopefully you’ve already been following the steps outlined for those in their 1st year of business.. if not all good… you have options.
If your prior year tax returns haven’t been filed then that’s your first priority. Once we know your tax liability for previous years, we can start planning on how much you need to put aside to pay this on time or with minimal late penalties and interest.
If you have arrears, then there are a number of options:
Contact IRD and set up an instalment arrangement – the IRD are a lot nicer if you keep them informed of your cash situation. With an instalment arrangement set up penalties will no longer be charged but interest will be. You work out how much you can pay them on a weekly/fortnightly/monthly basis and they will work out how many months the arrangement will go for to cover the core debt and the interest cost. You must stick to this arrangement or they’ll go back to penalty charges.
Pay your tax using the tax pool – Tax Management New Zealand are IRD registered and the industry leaders. They use the highest security standards so your funds are in safe hands. By paying TMNZ rather than the IRD, you get more time (up to 75 days after your terminal tax date) to pay your tax. Payments can be backdated to when they were due eliminating penalty charges and at a lower interest rate than the IRD charge.
Options for paying your current year’s tax
If your business profits are stable and similar each year then paying provisional taxes using the standard basis which is based on your previous year plus 5% assumed growth is a simple and straight forward way to pay your tax. Once your tax return is filed you pay the difference. An example of the standard basis for paying provisional tax for a business with a 31 March balance date is as follows:
Lest’s say Profitable Business Ltd’s tax bill for the 2019 financial year was $100k. They file their tax return before the first provisional instalment due date which is 28 August.
This year they must pay provisional tax totalling $105,000 but in 3 instalments:
$35000 on 28 August 2019
$35000 on 15 January 2020
$35000 on 7 May 2020
So by the 7 May after the financial year has finished they’ve paid $105k. We prepare their 2019 accounts and it turns out they did better than in 2018 and their tax bill was $110k. So the difference is terminal tax: $5000 due on 7 April 2021.
BUT: If your business profits fluctuate this standard way of paying your provisional tax might put on strain on cash reserves so the Accounting Income Method (AIM) was introduced. AIM uses your accounting software to calculate your profit at each GST period end date and works out your year to date tax liability. You pay this at the same time you pay your GST. You don’t have to be GST registered to pay tax using AIM but you do have to pay your tax on GST due dates – typically every two months. The theory is that if you have a good two months of sales and therefore a good profit by the time your customers pay you, you have collected the funds and can pay the tax on this profit by the due date – typically the 28th of the month following. If you make a loss in a two month period you may get a refund on the tax you’ve already paid.
Note, there can be a compliance cost associated with filing AIM returns as we need to review your reports for accuracy but for businesses whose performance fluctuates a lot the cost is worth it if it means only paying what you have to AND you have the comfort of knowing where you’re at and that your accounts represent your true position.