When calculating your tax bill, several of the expenses you encounter in your business can be deducted from your income. To minimise the amount of tax you are required to pay, consider taking the following measures.
Reducing your tax bill
Calculations for your tax bill are based on your net profit. By claiming valid business expenses, you can decrease the amount of tax you owe. Maintaining accurate records such as receipts and logbooks for up to seven years is necessary in case of an audit by the Inland Revenue. It may be beneficial to engage a tax agent who can offer their expertise and potentially save you both time and money.
Starting a new business — Inland Revenue
File and pay on time
This helps eliminate the risk of incurring interest or penalties.
If you are concerned about missing a payment deadline, contact Inland Revenue at 0800 377 772 to explore any available assistance.
What to do
- Opt for online banking as it is the fastest and most convenient payment method.
- As a first-year business owner, consider paying your tax bill before the end of the tax year to take advantage of potential discounts.
- If you are unable to make payments, visit the Inland Revenue website to apply for an instalment arrangement.
Apply for an instalment arrangement – Inland Revenue
What not to do
DO NOT make late tax payments, as the penalties can exceed the amount owed.
DO NOT overpay your taxes, as while refunds do include interest, the rate is typically lower than what you could earn through a savings account.
Tip
If you plan to commence a new business or self-employment close to the end of the tax year, it is advisable to wait until the start of the new tax year to reduce administrative burdens.
The tax year concludes on March 31st and begins anew on April 1st.
Claiming expenses
During tax season, your total taxable profit is determined by subtracting your allowable expenses from your income. Therefore, the more expenses you can claim, the lower your tax liability will be.
Numerous business-related expenses are eligible for a claim, and if you operate your business from home, you may also be able to claim certain household expenses.
What to do
- Ensure that you keep all receipts and invoices for expenses incurred.
- Whenever possible, pay for expenses that may be claimable business expenses through your business account to maintain a clear paper and electronic trail.
- Keep accurate records of all expenses and retain them for a minimum of seven years.
- It is essential to verify the deductibility of entertainment expenses with Inland Revenue, as they may be either 50% or 100% deductible.
- You can claim your expenses by entering the total amounts in the appropriate boxes on your tax return. While receipts do not need to be submitted with your return, you must have them on hand if Inland Revenue requests them.
What not to do
DO NOT claim the entire travel expenses if your trip includes both personal and work-related activities. Only claim the portion that pertains to your business.
More tips on claiming expenses
Entertainment expenses — Inland Revenue
Vehicle expenses
If a vehicle is used exclusively for business purposes, it is permissible to claim the full running costs. Even if it is your personal vehicle, you may still claim the running costs for its usage during work-related activities.
What to do
Calculate business use with either:
- using the cost method
- using the Inland Revenue kilometre rate.
To utilise these methods, you must have either maintained a logbook for at least 90 days every three years, which records distances, dates, and reasons for business travel or kept records of your actual usage.
If you fail to keep a logbook or actual records, you may claim up to 25% of the motor vehicle costs as business use. Nonetheless, you may be required to verify the percentage claimed.
What not to do
DO NOT file expenses on your GST return if you have utilised the mileage rate set by the Inland Revenue.
Vehicle expenses — Inland Revenue
More information about mileage rates — Inland Revenue
Expert view
How to minimise your tax
“In my experience, small businesses want to pay the amount of tax that they have to pay but no more, no less,” says tax expert John Shewan, formerly of PwC.
Shewan advises that there are legitimate ways to minimise the tax you pay, and the best approach depends on your business structure, whether it’s a sole trader, partnership, or company.
“Make sure your business structure lines up with your own personal family circumstances and with your commercial objectives. What I mean by that is you don’t want to rush off and form a company unless you really have to. It may well be best just to operate as a sole trader.”
He further advises ensuring that you claim all the business expenses you’re entitled to, and also consider how you structure your debts because the interest from business loans is tax-deductible.
“One of the most common mistakes I see small businesses making is to have their own private debt against their property [e.g. a home mortgage], but they have equity, their own money, tied up in their business.”
“They’re better to try and structure that in a way that ensures they match their borrowings against their business assets and can deduct the interest. That can save them up to a third of the interest cost.”
Tip
Claim only business expenses – not personal ones. Keep detailed records of your spending for your business.
Depreciation
Depreciation allows you to recover some of the cost of assets such as computers, vehicles, and machinery purchased for your business, by claiming the amount that the asset has decreased in value due to wear and tear or becoming outdated.
It is typically mandatory to claim depreciation, and if you choose not to do so for a specific asset, you should inform the Inland Revenue.
What to do
- Retain receipts and invoices for depreciable assets.
- Depreciable assets include software, websites, and some intellectual property.
- Combine low-value items into one asset (e.g., five $200 chairs = $1,000 asset).
- Keep a precise record of fixed assets, depreciation claimed, and adjusted tax value for each asset (retain for 7 years).
- Claim depreciation as part of the end-of-year tax return.
- Two calculation methods are available; choose one method for each asset and follow Inland Revenue’s depreciation rates guide.
What not to do
DO NOT neglect to maintain clear records when an asset is utilised both for private and business purposes.
Depreciation — Inland Revenue
Common business assets checklists
Deductions or tax credits for donations
For companies or Māori authorities, charitable donations can be deducted from their income.
However, individuals, including employees, sole traders, or partnerships, cannot claim an income tax deduction for charitable donations. They may be eligible for a donation tax credit instead.
What to do to claim donation tax credits
- Keep receipts for donations over $5
- Claim the donation tax credit separately from your income tax return
- Submit the donation receipts online using the link below
Submit a donation receipt — Inland Revenue
- You also have the option to submit the receipts offline using the following form:
Paper-based form for donations — Inland Revenue
How can individuals claim tax credits for donations — Inland Revenue
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