Starting Strong: Getting Tax Right In Your First Year Of Business
Finding your feet in the first year of business can seem like an ever-evolving task list, but tax is one thing to get ticked off quickly. Instead of waiting for your tax situation to snowball with a surprising result come end of financial year, take the time to jump on that tax learning curve. You might be pleasantly surprised to find it’s a relatively simple task once you’re in the swing of things.
Early payment income discounts
A key thing to remember is that you can make voluntary tax contributions prior to the end of financial year – and it could lessen your tax payment if you do. Known as Early Payment Income Discount, IRD encourage self employed or partnership businesses to make payments throughout the course of the year by offering a 6.7% discount (only applicable in your first year of business).
This is especially handy for businesses who qualify for provisional tax payments, as in your first year you’ll be required to pay tax for the year just been and also provisional tax for the year to come – effectively two years worth, which can be a big hit for a new business!
AIM (Accounting Income Method)
AIM is IRD’s new accounting method that can make your provisional tax payments easier and more accurate. With the AIM system, your provisional tax is calculated throughout the duration of the year according to your business income, via your AIM capable accounting software – currently, Xero, Reckon and MYOB all have AIM as an option. This may be an opportunity for new businesses to stay on top of tax to help cash flow and avoid penalties.
UOMI (Use Of Money Interest)
Unfortunately, if you haven’t paid your tax bill in full by the due date, IRD charges an interest rate of 8.35% on any short paid tax (certain criteria applies), to discourage people from using IRD as a ‘bank’. UOMI still applies if you have a payment arrangement with IRD, so it can have a significant financial impact on your new business. It goes without saying to put healthy financial practices in place to avoid late penalties.
If there’s one way you can get your tax bill down quickly, it’s claiming on tax deductible expenses. Throughout your first year of business, it pays to get into good habits with record keeping so everything is ready to go at the end of the financial year. Tax deductible expenses can include:
- Accident compensation levies
- Salary and wages
- Rent and rates
- Stationery and supplies
- Accountants’ fees
- Purchase of trading stock
- Repairs and maintenance on business items
- Power and phone costs
- Interest on money borrowed for the business
- Insurance of business assets or premises
- Business vehicle and transport costs.
It’s a given to set tax money aside for cash flow reasons, but make sure you’re putting that money into a separate, high interest account – hopefully, you might end up with enough interest to cover your tax agent bill or ACC levies by the end of the year!
That’s what we’re here for
It’s never too soon to find an accountant when you’re starting a new business. If finance isn’t your forte, we can help across the board; whether you want someone to manage your accounts entirely, or if you’re just looking for guidance so you can manage your accounts yourself. Talk to us to find out more.