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The tax man — what you need to know

Thursday, July 2, 2009
Getting started with a small business. Image: Getty

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By Diana Clement
MSN NZ Money writer

When you're bursting with a great business idea, the last thing you'll be thinking of is paying tax.

But the sad fact is that you'll need to start thinking about your basic tax responsibilities before you launch. You'll need an Inland Revenue Department (IRD) number to start with and you must learn to keep very good records from day one.

The good news is that keeping records can benefit you in the start-up stage because your costs prior to the launch of the business are tax deductible.

All small businesses need to pay tax regularly, file an annual tax return, and regular GST (goods and services tax) returns if you're registered, and if relevant, fringe benefit tax. You'll also need to pay Accident Compensation Corporation levies.

There are many tax benefits that small business owners are entitled to that wage and salary earners aren't. You can, for example claim depreciation on business assets such as a car. You can also claim for a home office if you have one, which allows you to tax deduct household expenses such as the purchase of tea and coffee, a proportion of mortgage interest and council rates.

When you first start in business tax can look like a bit of a maze. But once you get into a system with your record-keeping, the process will become second nature.

Most small businesses will use an accountant to handle much of their tax planning, although some take a DIY approach. You can find virtually all the tax forms you need to complete in the IRD's website and in many cases complete your returns online.

Businesses pay 30 percent tax on their profits. Depending on your personal tax rate, which can range from 19.5 percent to 39 percent, your accountant may be legally able to juggle some of income to minimise the tax both you and your business pay.

For example, it's possible to pay your spouse and children to do work, which may reduce your income to a lower personal tax rate.

One nasty catch for small business people is that if you earn more that you expect then you won't have paid sufficient provisional tax. Unfortunately that means that you pay interest penalties so you can't just file tax to the back of your brain.

If you don't pay the tax you're supposed to — even if you can't afford to — the IRD has some quite draconian powers. It can also choose to audit your business, which can be incredibly time consuming and expensive, and has sent more than one small business to the wall. The moral of this is to keep on top of your taxes.

Finally, it's worth attending a free tax course at your local enterprise agency.

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