Understanding New Zealand Tax: Your Questions Answered

In the complex world of New Zealand taxation, questions abound for business owners and individuals alike. Whether you’re trying to understand drawings, GST, or payment deadlines, having clear answers can make all the difference between tax confidence and tax confusion. Let’s explore the most common tax questions we receive and provide straightforward explanations to help you navigate your tax responsibilities with ease.

Drawings and Income Tax: The Facts

Do I pay tax on drawings?

The answer is an emphatic “no.”

Despite what you might have heard from colleagues or friends, drawings are not taxable. They never have been. Drawings simply represent money you’re taking out that you’ve already put into your business. Even if you withdraw more than you initially contributed, there’s still no tax on drawings.

Why is this? When you take drawings, you’re essentially accessing your own capital. What actually gets taxed is:

• For company owners: The shareholder remuneration allocated to you after preparing financial statements
• For sole traders or partnerships: The actual business profit, which flows directly into your personal tax return

Important note: While drawings aren’t taxable, they may affect your Working for Families Tax Credit calculations, as they could be treated as income for this purpose.

If you would like to know more about drawings, see our article: Drawings and shareholder current accounts

How much money should I set aside for taxes?

A practical rule of thumb is to set aside 20-30% of your earnings to ensure you have sufficient funds ready when tax time arrives. If you’re registered for GST, remember to keep an additional 15% aside to cover your GST obligations.

Understanding Different Types of Tax

What is terminal tax?

Terminal tax represents the difference between what you’ve paid throughout the year (through provisional tax, PAYE, or withholding tax) and what you actually owe.

• If you’ve paid too much: You’ll receive a refund
• If you’ve paid too little: You’ll need to pay the balance (terminal tax)

It’s essentially the final reconciliation of your tax account for the year.

When is terminal tax due?

The due date depends on whether you have an Extension of Time (EOT):

• With EOT: Terminal tax is due by April 7th following the tax year (for example, tax for the year ended March 31, 2022, is due April 7, 2023)
• Without EOT: Payment is due by February 7th the following year

Note: You automatically receive an EOT when you’re linked to a tax agent. However, the IRD may withdraw this privilege if you consistently file late or don’t pay on time.

Provisional Tax Essentials

When are provisional tax payments due?

For most businesses with a March 31 balance date, payments are typically due on:

• August 28
• January 15
• May 7

Your final terminal tax payment will be due April 7 of the following year (with EOT) or February 7 (without EOT).

Exceptions include:

• Six-monthly GST filers: Two payments due on October 28 and May 7
• Accounting Income Method (AIM) users: Payments due with each GST return, usually six payments annually

If you would like to learn more about provisional tax, see our article: The Ins and Outs of Provisional Tax in NZ

Paying Your Taxes

How do I pay my New Zealand tax?

You have several convenient options for paying your tax:

• Phone payment using a credit card
• Through your myIR login using a credit or debit card
• Internet banking (recommended to avoid additional fees)

All major New Zealand banks offer specific “pay tax” functions within their online banking platforms, making the process straightforward. When making a payment, you’ll need to include details such as your IRD number, tax type, tax period, and due date.

What if I have overdue tax?

If you’re facing overdue tax, consider these options:

1. Make the full payment immediately (preferred option)
2. Set up a payment plan through your myIR account
3. Utilize tax pooling services like TMNZ or Tax Traders, which can backdate your payment to the original due date for a fee (usually less than IRD’s interest charges)

Acting promptly is crucial since interest and penalties accumulate daily on overdue tax.

Will the IRD write off my tax debt?

The IRD rarely writes off tax debt. This only happens in extreme cases of financial hardship, and many applications for write-offs are unsuccessful. It’s best to address tax obligations proactively rather than hoping for debt forgiveness.

Tax Return Management

Can I amend my tax return?

Yes, amendments are possible if you’ve made a mistake, such as:

• Forgetting to include income
• Missing a deduction you were entitled to

However, amendments can only be made for returns filed within the last 4 years. If you believe an amendment is necessary, contact a tax professional who can help you navigate the process.

Will I be charged interest and penalties on provisional tax payments?

It depends on your circumstances:

• Standard method users with tax under $60,000: No interest or penalties if all payments are made in full and on time
• Standard method users with tax over $60,000: Potential interest charges
• Estimate method users: Interest may apply if your estimate is incorrect
• AIM method users: Generally no interest if reasonable care was taken with your AIM return figures

Getting Help With Your Taxes

Managing your tax obligations doesn’t have to be overwhelming. Working with a professional accounting service can help ensure you’re meeting all requirements while maximizing legitimate deductions.

The right accounting partner will:

• Explain complex tax concepts in simple terms
• Keep you informed about important deadlines
• Help you plan for tax payments
• Identify opportunities to optimize your tax position

By understanding the basics outlined in this article and seeking professional support when needed, you can approach your New Zealand tax obligations with confidence and clarity.

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Need more guidance on your specific tax situation? Reach out to our team of certified accountants who can provide personalized support tailored to your business needs.