Debunking Tax Myths: How Business Can Legitimately Reduce Their Tax Bill

In the world of self-employment, tax advice often spreads like wildfire—not all of it accurate or helpful. If you’ve ever found yourself searching “how to pay less tax” or “tax loopholes for small businesses,” you’ve likely encountered a mix of legitimate strategies and potentially harmful myths.

At Business Like NZ Ltd, we believe in small business with accurate, actionable tax information. Let’s cut through the noise and examine what really works when it comes to reducing your tax burden legally and effectively.

The 5 Most Common Tax Myths Debunked

Myth 1: Forming a Company Will Slash Your Tax Bill

Many sole traders believe that transforming their business into a company structure will magically reduce their tax obligations. This is one of the most persistent myths in the small business community.

The Reality: While companies pay a flat tax rate of 28%, you’ll eventually need to extract money from that company—either as wages or dividends. Either way, you end up paying similar amounts of tax as you would as a sole trader.

When you pay yourself wages:

• These come out before the company pays corporate tax
• You still need to deduct PAYE, ACC levies, and other obligations
• The end result is comparable to sole trader tax rates

When you pay yourself dividends:

• These come from profits that have already been taxed at 28%
• You’ll receive imputation credits for that tax paid plus 5% DWT the company has paid on your behalf.
• If your personal tax rate is higher than 33%, you’ll pay the difference
• For example, if your marginal tax rate is 39%, you’ll pay the additional 6% tax personally.

Add to this the extra administrative burden of maintaining a company structure and filing multiple tax returns, and the perceived benefits quickly diminish.

Myth 2: Claim More Deductions by Increasing Spending

It’s tempting to think that increasing your business spending will lead to fewer taxes. After all, business expenses reduce your taxable income, right?

The Reality: While legitimate business expenses do reduce your taxable income, purchasing items simply to lower your tax bill rarely makes financial sense.

Remember this crucial fact: tax deductions are not tax refunds. When you claim a $100 business expense, you don’t get $100 back—you only reduce your taxable income by $100, which might save you $30-33 in tax depending on your tax bracket.

Spending $100 to save $33 is not sound financial planning. Only purchase what your business genuinely needs to operate effectively.

Myth 3: Buy Expensive Business Assets to Reduce Tax

That new laptop, vehicle, or office equipment seems like a great way to lower your tax bill—but is it?

The Reality: Assets costing more than $1,000 must be depreciated over time rather than claimed as an immediate expense. This means:

• You only claim the calculated depreciation each year (the value the asset loses over time)
• The tax benefit is spread over several years, not received upfront
• The immediate impact on your cash flow often outweighs the gradual tax benefits

Make asset purchases based on genuine business requirements, not tax considerations alone.

Myth 4: Donate to Charity for Tax Benefits

Charitable giving is noble, but it’s not an effective tax reduction strategy.

The Reality: When you donate to registered charities in New Zealand, you can claim a tax credit of 33% of the donation amount—not a full deduction of the donation.

If you donate $1,000, you’ll receive a tax credit of $330. While this is certainly better than nothing, it’s clearly not a profitable tax strategy. Donate because you believe in the cause, not for tax benefits.

Myth 5: Hire Employees to Reduce Your Tax Bill

Some advisors suggest hiring part-time staff to create additional deductions.

The Reality: Employing staff carries significant responsibilities beyond the simple deduction of wages:

• You’ll need to manage PAYE tax calculations and payments
• You become responsible for KiwiSaver contributions
• ACC levy obligations increase
• Employment laws and regulations must be followed

The administrative burden and actual cost of employing someone far outweigh any potential tax benefits. Hire based on business needs, not tax strategy.

Legitimate Ways to Reduce Your Tax Bill

Claim All Legitimate Business Expenses

The most effective way to reduce your tax burden is to ensure you’re claiming all legitimate business expenses. These must be:

• Directly related to earning business income
• Necessary for operating your business
• Properly documented with receipts and records

Common deductible expenses include:

• Office supplies and equipment under $1,000
• Professional subscriptions and memberships
• Business travel costs
• Professional development and training
• Marketing and advertising
• Business insurance

Remember that personal expenses with some business use (like mobile phones or home office costs) can be partially claimed based on the proportion of business use.

Learn more: What expenses are tax-deductible in NZ?

Verify Your ACC Levy Classification

ACC levies are a significant cost for self-employed individuals, and many pay more than necessary due to incorrect classification.

The amount you pay depends on:

• Your liable income
• Your work type (classified by risk level)
• Your ACC cover type (standard CoverPlus or enhanced CoverPlus Extra)

ACC levies include:

• Earner’s levy (same for everyone)
• Working Safer levy (uniform rate)
• Work levy (varies based on occupation risk)

Each occupation has a specific classification code that determines your Work levy rate. Using the wrong code can result in unnecessarily high payments. Take time to verify that your business activity is correctly classified.

Learn more: How ACC Works for Businesses: A Guide for Owners

Maximize KiwiSaver Benefits

While not strictly a tax strategy, KiwiSaver offers financial benefits that shouldn’t be overlooked:

• Contributing at least $1,042.86 annually (about $20 per week) qualifies you for the maximum government contribution of $521.43
• Even partial contributions receive the 50 cents per dollar match up to the maximum
• You must be between 18-65 and residing in New Zealand to qualify

This is essentially free money that helps build your retirement savings—an opportunity no sole trader should miss.

How Business Like NZ Ltd Can Help

Managing taxes can be complex and time-consuming. At Business Like NZ Ltd, we specialize in helping New Zealand businesses navigate their tax obligations efficiently and accurately.

Our services include:

• Calculating and paying all taxes and levies on your behalf
• Filing annual tax returns
• Managing GST returns
• Handling ACC levy payments
• Advising on legitimate expense claims
• Providing ongoing tax guidance tailored to your situation

Our fees are transparent and reasonable—and fully tax-deductible as a business expense!

Conclusion: Smart Tax Management Makes a Difference

While the myths we’ve debunked might seem appealing as quick fixes, legitimate tax management is about consistent attention to detail and proper business practice. Remember that taxes fund vital public services—the goal isn’t to avoid paying your fair share but to ensure you’re not paying more than legally required.

By focusing on legitimate deductions, correct classifications, and proper financial management, you can optimize your tax position while maintaining complete compliance with IRD regulations.

Contact Business Like NZ Ltd today to discuss how we can help simplify your tax obligations and ensure you’re making the most of available deductions and credits.

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DISCLAIMER: The information provided in this article is for general educational purposes only and shouldn’t be taken as specific tax advice. Tax situations vary widely based on individual circumstances. For personalized advice tailored to your business needs, please contact Business Like NZ Ltd directly.