Taxation
Taxation
Being your own boss and going into business for yourself can be an exciting challenge.. However, being in business also carries certain responsibilities.
In general, you’re in business when:
• you start charging others for the goods or services you produce
• you supply these goods or services on a regular basis
• you intend to make a profit from selling your goods or services.
Basic tax responsibilities for a business are:
- You require an IRD number.
- If you’re a sole trader, you can use your personal IRD number.
- If you’re in business as a company or partnership you’ll need a new ‘business’ IRD number. This number will be used for GST (goods and services tax) as well.
- You will have to complete financial accounts and various tax returns each year, such as income tax and GST returns.
- If you’re an employer, you will have to make PAYE, student loan, child support and KiwiSaver deductions and pay these to the IRD.
- You may have to pay provisional tax during the year.
- You have to register for GST if your turnover is over $60,000.
- If you’re a sole trader you must pay your student loan repayments direct to the IRD.
The Inland Revenue Department (IRD) website https://www.ird.govt.nz/income-tax is a very good resource for clear information It is well laid out and sectioned to give useful information.
The IRD have also provided a useful small business guide that covers all common taxes and compliance as well as other matters to consider when managing a small business.
It’s a good resource for an overview of tax compliance. https://www.ird.govt.nz/situations/i-am-starting-a-new-business
There is also a comprehensive downloadable smart business guide available here https://www.ird.govt.nz/-/media/project/ir/home/documents/forms-and-guides/ir300—ir399/ir320/ir320-2022.pdf?modified=20220330223823&modified=20220330223823
For more information discuss your compliance obligations with your accountant.
You can find tax rates and codes here (https://www.ird.govt.nz/income-tax/income-tax-for-individuals/tax-codes-and-tax-rates-for-individuals/tax-codes-for-individuals/work-out-my-tax-code) .
The IRD require taxpayers to create an on-line IRD account – myIR which includes an email address for contact. All tax returns, GST, PAYE lodgements, filings are now managed through myIR and reminders are sent electronically.
MyIR is essential to file PAYE, GST and income tax, whether directly yourself or through your accountant.
Further some accounting software will directly integrate with the IRD and file your information directly.
PAYE
When you employ staff, there are employer obligations you need to meet. An excellent IRD guide can be found here https://www.ird.govt.nz/employing-staff
As an employer, you are required to make deductions from your employees earning a wage, salary or schedular payments. This is known as PAYE (pay as you earn). You must deduct and pay PAYE tax on your employees’ behalf by the due dates. This is to avoid penalties and interest charges.
If you pay your employees other benefits and allowances, including employee share schemes (ESS) you also have obligations you must meet.
You are required to keep full and accurate wage records for 7 years.
All employees must fill in either an IR330 Tax code declaration (for employees) to establish the rate at which PAYE tax is to be deducted. https://www.ird.govt.nz/-/media/project/ir/home/documents/forms-and-guides/ir300—ir399/ir330/ir330-2019.pdf
This form can be completed on screen and printed for signing. A simple flow chart guides an employee to select the correct tax rate.
You are required to deduct tax at the time of paying the wages i.e., weekly, fortnightly and you must file employment information every time you pay your employees. This is based on the date you pay employees (pay day) and may be weekly, fortnightly, monthly or more often if you have multiple paydays.
Filing Employment Information each payday may be challenging for employers at times, however filing Employment Information on time, ensures employee information is up to date and accurate. This helps ensure your employees are having the right deductions made and entitlements paid. It will also help support any application for the Government’s wage subsidy.
It is mandatory that all employment information is filed electronically and must be filed online in myIR no later than 2 working days after each payday. Most payroll systems integrate directly with the IRD and complete the information forms automatically each pay period.
Dates for paying deductions to the IRD varies depending on the size of the business but generally for small businesses PAYE will be due 20th of the following month.
Remember that you must keep the tax code declarations and employee wage information as part of your business records for seven years after the last wage payment has been made to an employee.
Goods and services tax (GST)
Once you earn over $60,000 a year, you need to register for GST, charge 15% GST on your sales and income, and pay it to the IRD. You can claim GST back on your purchases and expenses.
Goods and services tax (GST) is a tax on the supply of most goods and services in New Zealand. Therefore every time a service transaction is charged by a GST registered hairdresser or barber, the hairdresser or barber must include an additional 15% by way of GST.
For current IRD information go here https://www.ird.govt.nz/gst
Registering for GST
You must register if you are an entity and either of these apply to you:
- you carry out a taxable activity and your turnover was at least $60,000 in the last 12 months, or you expect it will be at least $60,000 in the next 12 months
- you carry out a taxable activity and you add GST to the price of the goods or services you sell.
A good guideline is to regularly look at your monthly turnover. If it’s $5,000 or more, you should register for GST.
If you are required/decide to register, you can do this through myIR secure online services. In most cases you’ll receive immediate confirmation of your GST number and registration details.
What you’ll need to do once you’re registered for GST
Once you are registered for GST, these are the things you must do:
- Keep full records so you (and IRD) can easily check your GST liability.
- Charge GST on all taxable supplies made in your business.
- Provide tax invoices for goods or services provided
- Account for GST on taxable supplies made and received.
- Complete GST returns and pay any tax owing by the due date.
It is important that you are aware of what you need to do as a registered person. You could be audited at any time and failure to meet your obligations may result in penalties being charged.
Charging GST on supplies
Supplies is the general term for goods and services you provide or sell in your business, and you will charge and account for GST at the rate of 15% on these. There are three other categories of supplies that have specific GST accounting rules: special, zero-rated, and exempt supplies. Examples of each type are provided.
Zero-rated supplies
- Certain taxable supplies taxed at the rate of 0% rather than at the standard rate of 15%.
Exempt supplies
- Exempt supplies are goods and services that are not subject to GST and are not included in your GST return.
Special supplies
- How to account for supplies that are different from the normal business sales or purchase.
You should obtain proper accounting advice on these matters.
Completing your GST return
Make sure you know the date when this is due and file your return and any payment by due date to avoid penalties.
- First you need to make sure you’ve correctly calculated your GST before filing your return.
Your accounting software can track this for you.
- Once you know your GST you will either need to pay the GST owing or,
- you may get a GST refund if your GST expenses are greater than you GST income.
- Login to your myIR and complete your return and follow the payment instructions if you owe GST
- If you are owed a GST refund then filing the return will automatically generate a refund request and the IRD will pay the money to the bank account that you provide them with.
Provisional Tax
Provisional tax helps you manage your income tax. You pay it in instalments during the year instead of a lump sum at the end of the year. You’ll have to pay provisional tax if you had to pay more than $5,000 tax at the end of the year from your last return.
At the beginning of each tax year the business owner estimates income for the coming year (most business’ end their tax year on the 31st March. If your business tax year ends on a different date check with IRD as to when your instalments are due). Most salons/barbershops base the current year’s estimated income on last year’s performance. This estimated figure will be used to calculate the tax rate.
The number of provisional tax payments you’ll need to make depends on how often you file GST returns and which provisional tax option you’re using.
If you’re not registered for GST, you’ll need to make three provisional tax payments.
If you file your GST returns six-monthly, you’ll need to make two provisional tax payments.
If you file your GST returns monthly or two monthly, and use the standard or estimation option for provisional tax, you’ll need to make three provisional tax payments.
Due dates for provisional tax
|
Number of instalments Payments due |
Dates for ProvisionalTax Due |
|
2 |
28 October and 7 May |
|
3 |
28 August, 15 January and 7 May |
In a business’ first year provisional tax is not paid because there is no basis for estimating income. However, the tax on the first year’s profit must be paid in full as terminal tax in the second year of business and will be due on 7 April.
In the second year of business this tax can be a heavy cash burden as the first provisional tax is due on 7 May.
See here https://www.ird.govt.nz/income-tax/provisional-tax for more information on provisional tax.
How do I pay provisional tax?
The IRD accept payments by:
• internet banking
• credit or debit card, or
• direct debit.
Provisional tax and GST – You can pay provisional tax with your GST on a GST provisional tax return.
Terminal Tax
At the end of the tax year, the actual business profitability is calculated. Provisional tax that has been paid is subtracted from the total tax to be paid on the profit earned. If the tax paid is not enough then the balance is owed – called terminal tax which is due on 7 Feb of the following year or 7 April for those with an extension of time (by using a tax agent). If your provisional tax payments were greater than the actual calculated tax owed, you will receive a refund, payable by the IRD on lodging the annual tax return.
Tax allowable deductions
A salon or barbershop is entitled to claim costs incurred by the business in the process of earning profits. Your accountant is the best person to give advice on how to arrange your business’ expenses for maximum allowable deductions. Remember to keep all receipts to support any claim.
Interest
Interest rules are generic across all taxes and duties. Two-way interest rules mean that IRD pay interest on any overpayments and you are charged interest on tax that is underpaid.
Interest compounds on outstanding amounts and also penalties.
Penalties
The IRD may charge penalties if you file returns or pay tax late, or if your returns are not right.
Criminal penalties can lead to penalty charges and a prison sentence.
Contact the IRD promptly if you’re not going to be able to pay your tax or if you think there’s something wrong with your return. If your ability to make tax payments on time has been significantly affected by circumstances, the IRD may be able to assist by structuring an agreed payment plan. Contact the IRD to discuss
The financial consequences of underpayment can be severe so act quickly and contact IRD if you get into trouble. Delays will make the penalties and other fees worse.
Change in status
You must tell Inland Revenue (in writing or Log in to myIR) within 21 days of any changes in:
- name (your own name or the name of your business)
- address (your business premises or postal address)
- your organisation’s constitution, articles of association (if any)
- the nature of your taxable activity (that is the general services that you provide to customers).
- turnover that will affect your accounting basis or taxable period.
Independent Earner (Rent a Chair)
Introduction
It is not unusual for a salon owner to consider entering into a licence agreement with a hair stylist or barber whereby the Stylist is ‘their own boss’ who rents a space and chair from the salon owner. These arrangements are commonly referred to as ‘independent earner’ arrangements.
One of the advantages for the salon or barbershop owner of such an arrangement is that the independent earner is not an employee and therefore is not subject to the range of employment legislation governing an employment relationship.
For the Independent Earner the nature of the arrangement can often be the first step towards the establishment of their own hairdressing salon or barbershop. The key thing is that the Independent Earner is not an employee of the business and as such is responsible for their own taxation arrangements, ACC levies, insurances (including income protection insurance) etc.
Remember that it is your businesses good name at stake so be careful when choosing an independent earner.
The Independent Earner Agreement
Like all professional relationships it is very important that the parties obtain independent advice prior to entering into any agreement. The advice should be both legal and accounting (including tax advice).
For the salon owner, one of the challenges is going to be the determination of a fair and reasonable agreement fee. In considering this matter cost items such as the power, rates, water, building rental etc. need to be factored into the fee together with the cost of providing staff assistance to the Independent Earner e.g. salon receptionist. The fee will always only be a percentage of the total salon operating costs.
See a sample agreement here (Link to Independent Earner Agreement at the end of this document)
Product Use and Sale
Another matter to consider is whether or not the Independent Earner provides their own product or whether they are able to use product owned by the salon. If it is the latter, is this product charged out to the Independent Earner at cost or otherwise?
If the Independent Earner sells to their client(s) salon product do they receive a percentage of the sale? Typically, this would be the case.
These two matters need to be clearly specified in the agreement.
Tax, Membership and Insurance
As independent earners are effectively running their own business, H&BNZ membership is not covered in independent earner agreements, so they would need to join in their own right as a H&BNZ member.
All taxes (including GST), insurances and ACC levies are the responsibility of the independent earner. Again, as the salon owner, it pays to make sure each independent earner meets their statutory obligations as it is your business’ good name at stake.