Understanding Tax Obligations and Deductions with Jason Topp
Arm yourself with knowledge of the tax system.
We’ll start with a disclaimer: Each business is unique, and any professional can only offer high-level guidance that serves as information rather than advice—but an improved grasp of the tax system will stand any SME in good stead. Knowledge is power, and in this context it can help you avoid trouble with IRD!
That said, business owners, strap in—we’re doing a deep dive into one of life’s famously compulsory elements: taxes. As always, it’s our policy to ask for expert input on any given topic, and when we can’t seek that inside our team, we look to trusted advisors.
In this case, that’s Jason Topp of SMYD Accounting and Advisory. We asked him to help our clients better understand their tax obligations and the deductions they can make to minimise their taxable income.
Understanding NZ tax types
In Aotearoa, there are a few different types of tax payable according to how you earn your money. Please note the examples below are just the main types that the majority of small to medium businesses encounter. These are:
Income Tax
Provisional Tax
Terminal Tax
Goods and Services Tax (GST)
PAYE
Understanding the “types” of tax you’ll need to pay is one of the hardest aspects to master for those starting out in business. Jason gave brief explanations of each one.
Income Tax
This is the tax you pay on your income or profits—basically the money you earn, less any money you spend making that money. This is billed based on the NZ tax year which runs from 1 April to 31 March. If you made $100k in sales during a tax year and spent $60k on business expenses, your profit would be $40k.
You either pay income tax in the name of the company at 28% or in your personal name at different rates. It generally depends on how you get paid (although there are other relevant factors): If you take a salary and no other money from the company, then you will usually pay tax in the name of the company, if you take drawings, generally it’s taxed in your personal name.
Income tax can be broken down into subcategories. Think of them as different types of car, all with four wheels used to get from A to B:
Provisional tax is a “type” or category of income tax, like a sedan is a type of car. Think of it as a tax that is paid in advance. IRD will estimate how much tax you have to pay (based off what you paid last year), then split it into 3 installments and ask you to pay it in August, January, and May. Not all taxpayers are required to pay provisional tax.
In theory, when you’ve completed your tax year you should have already paid your tax and shouldn’t have any drama with having to find extra cash for a bill—sounds good, but in reality it’s not always like this.
Terminal tax is another “type” of income tax. Let’s call this one an SUV; it’s income tax that’s paid after the tax year has completed and your accountant has completed your tax return. It can be paid in combination with provisional tax—if there is extra tax to pay over and above what you’ve paid provisionally, then the extra amount is terminal tax.
In some cases, IR will apply interest and penalties for late payments or underpayments. It’s vital that you work closely with your advisor to stay on top of these requirements.
GST (Goods and services tax)
This is known as a “pass through tax”. For business owners, its complexity lies in the fact that if you’re GST registered you have to pay IR 15% of the revenue you earn AND can claim 15% off your business expenses. You then pay the balance to IRD throughout the year.
Some revenue doesn’t have GST on it, and many expenses don’t have GST on them either. Examples are salary and wages, loan repayments and interest, and personal drawings.
If you are GST registered, Jason points out one important concept to get your head around: not all the money you receive from a sale is “yours”. Given that salaries and wages don’t reduce your GST bill but do reduce your profit, it’s all too easy to end up in a situation of mismatched GST and profit. Pay attention to your pricing and profit!
PAYE
This is tax you “pay as you earn” on salaries, and will be part of how you pay your employees (not contractors).
Jason’s main recommendation? Make sure no tax is a surprise! Being prepared is crucial—so if you can’t understand what types of tax you’ll pay under your own steam, be proactive about seeking professional advice. Having someone to walk alongside you as you set up effective financial systems and advise you of what to expect tax-wise will give you the confidence to make the very best decisions for your business.
Tax deductions
To ensure you are paying tax only on profit, it’s crucial that every business owner is claiming the full extent of tax-deductible expenses. When preparing a tax return, you—or, more likely, your accountant—will add up your gross income and deduct all allowable business expenses to determine your tax liability.
Recording and claiming all expenses, then, reduces your tax burden. It’s well worth the effort to do so properly! Jason shared with us an overview of what you can (and can’t!) deduct as an expense, so you can make sure you’re keeping track and minimising your taxable income.
Business expenses
This is a broad category! A good way to determine whether something you’re paying for is a business expense is to ask “did I spend this money in order to make money?” Alternatively, you can ask “did I spend this money as a requirement of running my business?” If the answer to either question is yes, it could be classed as a business expense.
For instance:
Marketing and advertising: we love seeing our brand with a strong online presence, however we’re only doing it to make more sales and make more money—so it’s a business expense.
Insurance: You’re only paying it as a requirement of running your business —so it;s a business expense.
There is a long list which could include an array of expenses depending on your business. The stronger the connection to running your business, the more definitive the expense claim is. Of course, there are some very obvious business expenses: supplies, materials, and labour/wages/salaries are top of the list. For subcontractor and employee expenses, and advice on how to determine if someone is an employee or not, business owners should seek guidance from HR specialists like the People and Culture Collective— it’s an area where accounting and HR cross over.
While recording business expenses accurately is in your best interest, Jason advises that business owners don’t focus everything on claiming expenses. Spending all of your time and energy on “claiming as much as possible” is a race to the bottom. You may feel like you’ve got “one up on IR”, but he is yet to see any business owner create something great with a sole focus on claiming as many expenses as possible. His advice? It’s better to focus on increasing sales or margins. If you’re paying tax, you’re still better off than if you didn’t make any money at all!
Less clear-cut expenses
Some expenses straddle a “grey area” of both personal and business use. The main ones are:
Home Office.
A number of people use parts of their home as their office for work. Depending on a range of different criteria, you may be able to claim a certain percentage for your house expenses as a business expense. These include, but are not limited to:Mortgage interest
Rent
Rates
Home and contents insurance
Power
Gas
Water
Motor Vehicle.
Another area of cross over! This is a super hot area for IRD; this means it’s important to ensure you’re following the rules when claiming for a motor vehicle expense. In a nutshell, you can:Own your vehicle privately and only claim mileage based on how many kilometres you travel for work. You’ll need to keep records of where you’re going, why, and how far.
Your business can own the vehicle and you use it personally. This especially needs to be managed closely and it’s advised you only do this under the guidance of a tax professional.
Non-deductible expenses
A few things that may answer “yes” to the questions above are not claimable. These include:
Child care.
Sadly, while child care is an expense that “allows” you to make money, it isn’t directly involved in the process of making money (unless you’re in the business of childcare). It’s a tricky one because without childcare, there would be no business for many people—but the expense must be directly involved in the making of moneyClothing.
Unless it’s branded (marketing) or PPE (job-specific), then you can’t claim clothing as a business expense. We know that a lack of clothing to suit the industry you’re in would affect your ability to make money—but once again, it isn’t directly involved in the making of money.
Traits of the most successful trades and service business owners
Jason says:
“I work with a lot of businesses across the trades industry. I reckon I’ve learnt a thing or two about what separates the successful (and rich) ones from those that have just created a job that has no annual leave or sick leave, but does come with its own dose of stress, anxiety and s**t hourly rates less than minimum wage.”
He paints quite the picture—so what is the difference between those that make it and those that don’t?
Here are five traits, habits, or capabilities of successful business owners that stand out:
They know their margins better than they know themselves. They have software in place and will either pay someone to train them or outsource it to another company, because they know that the cost of someone else managing it equates to less than 1% of their margin. In many cases, a professional administering your job management system will make you money as they can help you maintain the best profit margin possible.
They can confidently say that all their guys are billed out at 90% and all materials are on-charged. It’s unbelievable how many people can’t confirm or deny this.
They invest in their business. Those on the worst hourly rate are those that make it their life’s ambition to spend as little money as possible on their business.
They can confidently articulate what their exit strategy is: do they want to sell it, bring on an equity partner, or step into a silent director role and take a passive income from the business? If you can’t answer this, you're in a job.
They have advisors. They surround themselves with people that are smarter at different parts of running a business than they are.
They would apply for, and succeed in, a job as CEO of a company in their industry. Because they see themselves as business owners first and tradespeople second.
Jason’s TOPP tips
In order to leave you with something more broadly helpful, here are Jason’s tips for SME owners, whether in the trades or other industries:
Find an accountant that uses technology in order to free up time and be involved in your business with you. They need to be able to help you make a decision!
Have a plan! Otherwise, you’re just working a job. Pretty simple. Set an ambitious goal and break it down to 90-day increments. Have someone hold you accountable and provide the guidance you need.
Set a budget!
Treat your business with the respect it deserves and learn how to be a CEO. It is actually quite fun!
Don’t skimp on your administration. You MUST ensure your job software is being used to its full potential. It’s not enough “to be using Fergus”. An administrator will pay for themselves fivefold through saving your margin or ensuring you’re capturing all your billable time.
AI: it’s coming, but it’s not the be all and end all. It won’t take over bookkeeping or accounting, but it will make redundant those within the industry that don’t enjoy being actively involved in your business.
And for staying tax compliant? Make sure you have a good accountant, good bookkeeper, and great software on your side. Keep up to date with law changes, invest in the experts, and you can’t go too far wrong.
Disclaimer: The information provided in this document is intended solely as a general guide and does not constitute tax advice. While every effort has been made to ensure accuracy, the content may not reflect the most current tax laws or interpretations. Tax matters can be complex and vary depending on individual circumstances. We strongly recommend consulting with a professional tax advisor to address any specific questions or concerns you may have regarding your tax obligations. The author of this document disclaims any responsibility for any errors or omissions and cannot be held liable for any actions taken based on the information provided.
Need business advice and accounting expertise specific to your business? Get in touch with Jason’s wonderful team at SMYD. And if you are looking for an administrator or bookkeeper to ensure you’re staying compliant and organised at all times, book a chat with Kellie to talk about how Released can help.
