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Smart Tax Planning: A Quick Guide

Carmen Henning
Every year we reach that dreaded (for some) final quarter of the tax year. It’s the time when you’re paperwork stack seems to be bigger than ever (unless of course, you have a good accountant). You might be wondering if there’s a way to optimise your tax situation, well hey! You’ve come to the right place.

Understanding your taxes: 

Every single year, as the end of the financial year approaches, it’s almost as if you can hear the business owners biting their nails and gritting their teeth. Little do they know, if their tax is being done correctly then there should be nothing scary. For those of you who’ve been sitting in a dark corner pretending taxes don’t exist, the tax year in NZ runs from 1 April to 31 March. If you’re a successful business owner, we expect you’re already well aware of these dates.

When you submit your annual tax return, it must be based on the money you earned (trusts, companies, partnerships, etc). Additional income sources, like rental income, require declaration and payment as part of your personal annual tax return. It’s important not to leave out those side hustle earnings, you’ll only end up paying for it in the long run. If you're employed, your employer handles PAYE so nothing for you to worry about!

Tax rates:

For Individuals, your annual tax is calculated based on a sliding scale corresponding to your income. See below:

Tax Rate for each dollar of income

- Up to $14,000 = 10.5%
- Over $14,000 and up to $48,000 =17.5%
- Over $48,000 and up to $70,000 = 30%
- Over $70,000 and up to $180,000 = 33%
- Remaining income over $180,000 =39%

^ The above tax rates are scheduled to change in July 2024.

Companies - You face a 28% tax on Taxable Income.

Trusts - You’ll get a fixed 33% rate (changes coming after 2024).

Reducing your tax bill:

Is it easier said than done? The key to reducing your tax bill is all in trimming your taxable income. Taxable income is what's left after deducting tax-deductible expenses (the stuff you can write off against your income). You can cut taxable income by earning less (obviously a less than ideal choice) or increasing your tax-deductible expenses.

It is important to note that less taxable income also means a smaller net profit - so remember that when you want to decrease your tax bill, but still want to hit those KPIs.

If you have a company or trust, and your income is is above 48k (and you don't need more individual income to live off), you can retain profits to reinvest in the company (where the rate is 28%) and minimise tax.

Tax-deductible expenses:

OK so you chose the right way, oh sorry, we mean the “smart way”. So now what can you claim as a tax-deductible expense? Think advertising costs, travel (for business purposes) electricity, wifi, freight, rent or mortgage interest (if your home is your office), cleaning services, and low value assets below (<$1,000) to name a few. 

The golden rule is that the expense needs to be directly related to your income to be deductible. In other words: Did I incur the expense to generate my income?

What Won't Help:

Fancy expensive tech or cars won't immediately slash your tax bill. They're considered assets, depreciating over time without instant tax benefits. So yes, buying that vehicle at the end of financial year isn't going to decrease your tax bill. Don’t splurge because any asset with a value higher than $1,000 will not help slash the 2024 tax bill.

Tax Planning Throughout The Year:

We know regular checkups are important, but what about checking in on your taxes? Stay informed and up to date on your profits and losses by using helpful accounting software like Xero (or your accountant’s brain.). 

If you’re turning a profit, estimate your tax using the suggested percentages. If you’re making a loss? No worries – you might not owe tax (hoorah!). If you're paying provisional tax, you should be on the right track. This might look different from what you earned in the new year, but will all contribute towards your bill.

Need Assistance?

If you're navigating the murky waters of tax and need a crystal ball, reach out to BOM – we like to think we’re know-it-alls.

Carmen Henning

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