Tax compliance is a critical issue for small businesses, and the importance of getting it right was highlighted when the Inland Revenue Department (IRD) received an additional $78million in this year’s Budget to fund its ‘compliance’ activities (and investigate non-compliance).
However, keeping up with your tax obligations is not as arduous as it may seem.
The key is to get it right from the start.
This involves having appropriate systems and processes in place with information to make the correct returns and payments at the right time.
The first step is to decide on the best structure for your business.
Will you need limited liability? Will you initially be making losses? Will you need access to non-taxable gains?
A company has limited liability, but any capital gains are trapped until the company is wound up.
The company tax rate is currently 28%, but profit distributed to shareholders would attract tax at 33%.
A Trust has the benefits of retaining profits within the Trust (current taxation rate is 33%), or distribute to beneficiaries as required at their respective taxation rates.
A small business (five or fewer owners) may want to use a Look Through Company (LTC) as it has the same tax characteristics as a partnership but with limited liability, It allows non-taxable gains to be passed out tax-free to the shareholders.
Losses (with limitations) can also be used against the shareholders’ income, but profits are taxed directly to the shareholders.
LTCs have specific rules and hence you should obtain professional advice when considering this structure.
You may also want to operate as a sole trader or as a partnership company with profits taxed at individual taxation rates.
However, your liability will not be limited and you run the risk of being personally liable for all debts of the business.
Having adopted a structure, you must discuss structural issues such as shareholder changes with your accountant as this can result in unforeseen tax circumstances such as tax losses or credits being forfeited.
Accounting packages are now relatively cheap and increasingly user-friendly.
There are many packages available online, such as ‘Xero’, which automatically download your bank transactions into the system, cutting down on time.
These systems can also be used to invoice either manually or online through email. This information can be accessed anywhere, even from smart phones, avoiding the need to sit at an office, collate information in a shoebox or visit your accountant.
It is easier to keep your records up-to-date and file Goods & Services Tax (GST) or Fringe Benefit Tax (FBT) returns or pay provisional taxes on time.
GST & FBT options
The bottom line is businesses pay tax. If you do not file returns or pay tax on time, you will have penalties and interest to pay in addition to the core tax.
Planning, being organised and knowing your options are instrumental in avoiding stressful situations.
There are various options available within the tax systems to suit your specific circumstances. For example, subject to meeting certain criteria, you can choose your GST period.
You can also choose to account for GST on cash basis or invoice basis. You should choose cash basis if you are not being paid up-front for the services as it results in tax being payable later than under the invoice basis.
The opposite is true where suppliers allow you credit and you have cash customers.
Another option would be to pay FBT annually instead of quarterly, deferring payment and enabling provision of up to $1200 of ‘unclassified benefits’ per employee per annum instead of the $300 per quarter.
For small businesses with cyclical cash flows, the GST turnover method can be used to calculate provisional tax.
This links your provisional tax payments to your two-monthly GST returns, so that you pay more when sales are good and less during dry periods.
Obviously, this is more attractive if your dry periods are early in the income year.
If you have problems paying taxes and incurring penalties and interest, there are some options for purchasing tax payments from intermediaries.
This may avoid penalties and reduce interest costs.
IRD has various online services, which allow online filing of returns.
There is ready access to information through guides and tools for queries.
There are calendars available to map out the due dates for returns and taxes for the tax year. Please ensure that you make PAYE and GST payments, as this is money held in trust by you for the government, and hence IRD will take defaults seriously.
If you have serious cash flow problems, you should contact IRD.
In many cases, the Department may allow you to enter into an instalment arrangement to pay tax and stop late payment penalties accruing.
Andrew Hill is a Partner & Business Advisor and Joshna Mistry is Manager, Business Advisory Services at BDO Auckland, which is a part of the BDO network of independent chartered accounting and business advisory member firms.
Emails: email@example.com; firstname.lastname@example.org Website: www.bdo.nz
The above article should be taken only as a guideline and readers should consult their professional accountants for issues relating to their specific business. Andrew Hill, Joshna Mistry, the management and staff of BDO Auckland and Indian Newslink, including its Editor and Publisher absolve themselves of any liability or responsibility that may arise from the above article.
Readers may seek clarifications by writing to email@example.com