The income tax obligations of a business

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There are many different types of tax you need to pay when running a business. One of these is the tax you pay on the income your business receives, that is, your profits and the expenses or deductions you may claim against your income. Here is an overview of how it works for different kinds of businesses.

Look-through companies and qualifying companies

An LTC or look-through company is a special tax structure for companies with limited liability that allows the company to transfer its income and expenditure directly to its shareholders. The owners/shareholders are liable for income tax on the LTC's profits, while also being able to offset losses against other income. Tax is paid by returning your proportion of the income and expenses in your own income tax return.

The look-through treatment does not apply to GST, PAYE, FBT, RWT, RSCT, ESCT or the income tax rules for company amalgamations.

Sole traders

A sole trader is one person trading on their own. They pay tax on their net profit at the individual tax rates. Sole Traders may be eligible for the IETC (if earning between $24-48K PA), which makes the amount of tax owed less.

Companies

As a formal and legal entity in its own right, separate from its shareholders, a company has its own unique tax obligations. Profits earned are taxed at the company tax rate of:

  • 28 cents in the dollar for income years 2012 and later

Types of business income tax returns and forms

As well as completing the right kind of tax return for your company (there are different ones), you'll need to attach either a copy of your financial records or a form that summarises your income and expenses. Here’s a list of the different income tax returns and forms you might need.

Tax return you should use:

  • Sole trader - IR3 (this is an individual tax return)
  • Company - IR4 (although there are some exceptions)
  • Estate or trust - IR6
  • Partnership or LTC - IR7
  • Māori authority - IR8
  • Club or society - IR9
  • Registered superannuation fund - IR44

Forms for summaries of business and expenses

companies, clubs or societies and registered super funds should use:

  • Schedule of business income (IR3B), or
  • Farming income (IR3F), or
  • Rental income schedule (IR3R), or
  • Financial statements summary (IR10), or
  • Property sale information (IR833)

companies, clubs or societies and registered super funds should use:

  • Financial statements summary (IR10), or
  • Property sale information (IR833)

Maori authorities should use:

  • Schedule of business income (IR3B), or
  • Rental income schedule (IR3R), or
  • Financial statements summary (IR10), or
  • Property sale information (IR833)

When are tax returns due?

If your balance date is between 1 October and 31 March (inclusive) it’s the 7th of July.

If your balance date is between 1 April and 30 September (inclusive) it’s the 7th day of the 4th month after your balance date.

In case you don’t know, your business balance date is the end of the accounting year. When you apply for an IRD number, your balance date is 31 March. This can be changed by written request to the IRD. If you do not have written approval from the IRD you cannot use a different balance date. 

As a tax client of O’Connell & Co you will receive an extension of the time you are required to file your income tax returns.

When is payment due?

Payment is not due at the time of filing. If this is your first tax year you shouldn’t have to make any income tax payments. However, during your second year of business, you must pay tax on the profit you made in the first year, and you may also need to pay provisional tax for your second year (depending how much profit you made in the first year).

Budgeting for tax payments

Income tax is just one tax you’ll have to pay in business. To make sure you’re never caught out it pays to work it into your budget year round. Think of it as a savings plan – for every dollar earned you stash away what will eventually need to be paid in tax.

For specific advice on what percentage of your income to put aside for tax purposes, get in touch. We work with you to minimise your tax within legal bounds and help you avoid costly penalties. We provide complete assistance and advice you can count on in all areas of business taxation.

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