My tax obligations as a business owner
Getting familiar with your obligations as a small business owner
Your tax obligations
When you start or buy a business you’ll have a lot of decisions to make. One important early decision is the choice of legal structure. For instance, you might want to operate as a sole trader or in partnership, through a trading trust, or form a company.
Different ownership structures have different obligations and benefits. For example, if you choose to form a company your business becomes a separate legal entity, meaning you and any other shareholders have limited liability for the company debts (although in practice your bankers may ask you to personally guarantee the company’s loans). However, as a director of your company you will take on new responsibilities including making sure your company can meet its financial commitments, provide a safe working environment for employees, and meet tax and financial reporting obligations.
It’s good to talk to your lawyer and accountant before you decide which legal structure is right for you and your business. It’s also good to talk to your financial Adviser, who can help you to understand key business risks and how to best protect the investment and effort you’re putting in to building your new venture.
Tax obligations for companies
If you choose to operate your business through a company, it’s important to have good processes in place from day one to manage the company’s tax obligations. Companies pay income tax at 28% on business profits, in provisional tax instalments throughout the year, and may also have to manage GST, PAYE on employee wages, withholding taxes and FBT. Good record keeping is key and it’s important to monitor business cashflow to make sure cash is ready to pay tax when it’s due.
A company calculates its profit for paying tax, based on specific tax rules. For instance, generally only 50% of the cost of entertaining customers and staff will be deductible, and timing rules delay some deductions (such as for amounts put aside for holiday pay) until cash has been physically paid. Companies are able to deduct fair market value salaries paid to working shareholders. Generally companies deduct PAYE from regular payments to working shareholders, with shareholders paying provisional tax directly to IRD on irregular payments.
Start-up companies will often need to re-invest after-tax profits into growing the business. When dividends are paid to shareholders, the companies attach imputation credits (this recognises that the company has already paid tax on profits) and/or deduct resident withholding tax (RWT). When the dividends are paid to individuals the imputation credits and RWT deductions must total 33%. This means that when a shareholder includes the dividends in their personal tax return, no further tax is payable. And shareholders with personal tax rates below 33% are able to use the tax credits to offset or refund tax payable on non-business income.