Starting a Business

Business Tax Obligations
The aim of tax law as it relates to compliance and the penalties for non-compliance is intended to encourage voluntary compliance with legislation.

The law sets out clearly the obligations every taxpayer has and the standards that they are expected to meet when complying with those obligations.

Tax law clearly states the following:

  • You must correctly determine the amount of tax you have to pay.

  • You must deduct or withhold the correct amount of tax from payments or receipts that the law requires you to withhold.

  • You must pay your tax on time.

  • You must keep all necessary tax information and records which will enable your correct tax liability to be calculated.

  • You must cooperate with IRD at all times by disclosing all information and explanations required.

  • You must comply with any other obligations imposed by any other tax laws.

  • You must correctly respond to a personal tax summary if you have received one.

  • You must advise IRD that you need to receive a personal tax summary if one has not been sent to you.

The ultimate responsibility for complying with tax law will always remain with you, the taxpayer. It cannot be transferred to anyone else, not even to your accountant or other tax agent.

During Your First Year in Business

  1. Your first year in business is not tax-free. If, at the end of your first year in business, you have made a profit, you will have to pay tax on this.

  2. You may choose to make voluntary tax payments during your first year of business, which helps to spread the eventual tax cost. Some individuals in business, who make voluntary income tax payments during their first year of business, may be entitled to claim an early payment discount.

  3. If you have not been making tax payments during your first year in business, the tax will need to be paid by 7 February in the following year if you have a 31 March balance date (or, if you have an agent, by 7 April).

  4. If you want a balance date other than 31 March, you must apply in writing to IRD stating the reasons why and IRD will advise you of your new payment dates.

  5. After your first year in business you may be required to pay income tax in 3 instalments during the year. This is called provisional tax.

If you are a sole trader and have a student loan, you may also have student loan repayments to make. After your first year you may have to pay interim payments.

Deductible Expenses
Under the core provisions of the Income Tax Act 1994, a taxpayer must determine what their annual allowable deductions are for any income year when they calculate their income tax liability for that year.

Basically, a taxpayer’s income tax liability is calculated by deducting all allowable deductions from gross income to arrive at the net income for that year. From that net income a deduction may be made for any net losses, to arrive at the year’s taxable income.

It is on that taxable income that tax is levied.

The test of tax deductibility requires the expenditure to be either:

  • Incurred by a taxpayer in deriving gross income.

  • Necessarily incurred by the taxpayer in the course of carrying on a business for the purpose of deriving income.

Any expense must be apportioned between what is deductible and what is non-deductible if the expenditure was not incurred wholly in deriving gross income or carrying on a business.