Sustainable Business/New Zealand business structure, tax and compliance
What business structure should you choose?
In order to trade and open bank accounts for your business, you need to choose a business structure. This comparison of three most commonly used business structures in New Zealand will help you decide which structure best suits your business.
- 1. Sole Trader
A sole trader operates a business on his or her own. The trader controls, manages and owns the business and is entitled to all profits but is also personally liable for all business taxes and debts.
Usually a sole trader can establish the business without following any formal or legal processes and can employ other people to help run the business.
Many New Zealand businesses start as sole traders and then progress to the company structure as the business grows. Others form companies right from the start to take advantage of the protection and other benefits offered by the company structure.
|Easy to start and to run||Sole traders can lack credibility in the marketplace|
|No registration is required||Can be harder to attract loans and investment or sell the business|
|Owners have unlimited liability for all business taxes and debts, putting their personal assets at risk|
|The business only lasts the lifetime of the sole trader|
- 2. Partnership
Partnerships have been common among professional people and in the farming industry.
In a partnership two or more people run a business together. Each partner:
- Shares responsibility for running the business as well as in any profits or loss equally, unless the partnership agreement states otherwise
- Is liable for any debt within the partnership.
Many partnerships are established with a formal partnership agreement.
The partnership itself does not pay income tax. Instead it distributes the partnership income to the partners. The partners then pay tax on their own share. For more information on tax obligations visit the Inland Revenue’s website at www.ird.govt.nz.
Once the standard (and required) business structure of professional people (lawyers, doctors and accountants), partnerships are no longer as popular as in the past since the company structure is now open to professionals and arguably offers better protection.
|Can be an effective way to share business operation costs (e.g. several professional people operate out of a joint office)||Partners may be liable for debts incurred by other partners, putting personal assets at risk|
|No registration is required to start a partnership||Possible partnership conflicts or complications if a partner dies or wishes to leave the partnership|
- 3. Limited Liability Company
A company exists as a formal and legal entity in its own right. It is separate from its shareholder(s) or owner(s) – the person or group of people who own shares in the company. Companies can be registered (incorporated) online through this website www.companies.govt.nz.
The limited liability company has proved to be the most popular and successful form of business structure. Companies help foster confidence in businesses by governing the relationships between investors (shareholders), directors and creditors and by giving stakeholders a clearer picture of who and what they are dealing with.
|Limited liability advantages and greater chance of protecting personal assets since the shareholders’ liability for losses is limited to their share of ownership of the company.||Limited liability advantages can be reduced by the need to provide personal guarantees to lenders or creditors. Protection can also be eroded if the company has been trading while insolvent or is considered to be ‘trading recklessly’.|
|As a separate legal entity, the company can endure beyond your ownership or lifetime.||Directors need to clearly understand their responsibilities towards the company and its stakeholders.|
|Easier to sell the business or pass it on to others as it is a separate entity and investors can buy shares in the entity.|
|Can be easier to attract funds and investment (investors can become shareholders).|
|More credibility in the marketplace as the business structure can seem more ‘professional’.|
Other Business Structures
- Loss Attributing Qualifying Company (LAQC)
An LAQC is a variation of a company structure with a special tax status that allows you to offset any losses incurred in running your business against your personal income from other sources (such as investments).
- Trading Trust
Trading Trusts can offer benefits, but they are complicated and require expert advice. Discuss this option with your accountant and your lawyer to see if it is more appropriate for your needs than the business structures outlined above.
A co-operative business is owned and democratically controlled by its shareholder/members (for example, a group of craftspeople). People (or entities) involved in a co-operative business choose to work together to achieve business goals that may not be possible or as easily achieved through individual or separate effort.
The shareholders/members contribute the prime capital for the business and share in the profits of the business in proportion to their participation: the greater the participation, the larger the proportion of profits.
Keeping on top of tax
You will be doing both yourself and your business a great favour if you get on top of taxation issues right from the start. In the well-managed business there should never be an ‘unexpected’ tax shock because most taxation is predictable and therefore can be planned for, especially if you consult with your accountant and get free training.
- Benefits of keeping accurate records
There are good legal business reasons for keeping accurate records. Here are three:
- 1. Better control of your business or organisation
Accurate records will help you determine whether your business is making enough money to meet its expenses. They’ll show you what you’re spending money on and where the money is coming from. This will help your budgeting and decision making.
- 2. Increase your chances of getting finance or funding
Good record keeping shows you’re running the business in a professional manner. This makes it easier for others to know whether to invest in your business or project or loan you money.
Accurate records make it easier to put a good case together.
- 3. Save time and money
The more up-to-date your records are, the quicker you’ll get through your tax returns and other paperwork. If you’re doing the day-to-day bookkeeping, your accountant won’t have to spend valuable time (that you’re paying for) getting your books in order. You can use the accountant’s services instead for more specialised tax and financial advice.
- Consider accounting software
Get help from your accountant in selecting and setting up a suitable accounting system for your business that will enable you to track tax and predict your obligations. You may wish to start with a simple manual system, but upgrading to accounting software can help you gain better financial control of your business. Here’s why:
- You can download your bank statement details from your bank’s website directly into your accounting program, eliminating the need to enter all the data manually. This is a great timesaver and can cut down on errors and make it much easier to reconcile bank statements with your cash book.
- If you need to make any changes to figures, totals will be automatically recalculated.
- Provided you keep your data entry up to date, you can generate instant reports, such as budgets, GST reports, profit and loss accounts, etc. These allow you to see at a glance your GST and other tax obligations.
- Tax in a nutshell
You have four basic tax obligations.
- Register for correct tax types depending on your situation (such as GST, PAYE, FBT.)
- File tax returns by the due date.
- Pay the amount required by the due date.
- Make sure what is stated on the returns is accurate.
- Getting help
Inland Revenue offers a free business tax information service to businesses.
Their advisors will tell you:
- which taxes you need to know about
- what records you need to keep
- how to complete your tax returns (for example, GST and employer returns)
- when to file returns and make payments.
To find out more about these services or to arrange an appointment, visit www.ird.govt.nz or freephone 0800 377 774.
- Paying income tax
The amount of tax you pay is based on your net profit. This is your business income (all the goods and services you have sold) less the expenses used in gaining your business income. You need to submit a tax return every year.
- The balance date (tax year)
The standard financial (accounting) year for most businesses begins on 1 April and ends on 31 March, so this means you need to have your accounts up-to-date by 31 March, the balance date, so you can work out the profit you’ve made and the amount of tax you need to pay.
Your tax return is due by 7 July.
If you want a balance date other than 31 March, you must apply to Inland Revenue in writing, stating sound business reasons for the change. You can’t use another balance date until you have written approval from Inland Revenue.
- Your first year in business is not tax-free
A common misconception is that your first year in business is tax-free. If you make a profit at the end of your first year in business you will owe tax, but that tax can’t be accurately assessed until you or your tax agent has completed your annual tax return.
So, although you may not be actually making tax payments on your profit during your first year, that year is still taxed. You will have to pay this tax by 7 February in the following year, or, if you have a tax agent, by 7 April.
- Registering for GST
You must register for GST if your business turnover (sales and income) is likely to exceed $60,000 in your first year of trading. A good tip here is to keep an eye on your monthly turnover. If it’s $5,000 or more, you should register for GST.
If your turnover will be below $60,000 then you can still choose to register for GST . However, as soon as you register, you can claim 12.5 percent GST on all your business expenses and purchases. (Of course you will also be required to pay 12.5 percent GST on all your business income and capital sales).
- Three options
When you register you have a choice of three ways to account for GST.
- Payments basis
- Invoice basis
- Hybrid basis (combination of the first two).
Get advice from your accountant or tax agent on which of these three options best suits your business.
- GST Tax invoices
To claim for GST, remember to keep proper tax invoices of all good or service you supply as well as invoices for all the goods and services you buy for the business.
Invoices must clearly show the words ‘Tax invoice’, include the name (or trade name) and GST registration number of the supplier, the date, a description of the goods and services and a statement that GST is included.
If you decide to employ staff, you must register as an employer. You can complete the online employer registration at www.ird.govt.nz or ask for the First-time employer’s guide (IR 333), which has an Employer registration (IR 334) form in it.
Your main responsibilities as an employer are:
- You must deduct PAYE from your employees’ wages, and pay the deductions to Inland Revenue either once or twice a month, depending on the total amount of PAYE deducted by the business.
- Get new employees to fill in a Tax code declaration (IR 330). This tells you the tax code to use.
- Complete an IR 345 or IR 346 and send it with your payment by the due date.
- Deduct child support from employees’ wages, if required.
- Deduct loan repayments from any student loan borrowers who work for you, if required.
- Complete an Employer monthly schedule (IR 348) with the details of each employee’s deductions.
- Pay fringe benefit tax on any fringe benefits (perks) you give to your employees.
- Fringe benefit tax (FBT)
As an employer, you’ll have to pay FBT on most benefits (perks) given to your employees or shareholder-employees (including yourself). For example, motor vehicles; free, subsidised or discounted goods and services; low-interest loans; employer contributions to superannuation schemes and specified insurance policies.
Get more advice from your accountant or Inland Revenue’s Fringe benefit tax guide (IR 409).
- Is your worker an employee or a contractor?
The tax laws are different for employees and self-employed people, so it’s really important you know whether the people working for you are your employees or are self-employed contractors.
This is not as obvious at it might seem, so get advice to avoid possible penalties.
Inland Revenue’s guide, Self-employed or an employee? (IR 336) can help you determine whether your worker is an employee.
In addition to tax obligations, there are other compliance issues you need to consider in your business. Here’s a brief overview.
- Health and safety
A safe work environment leads to happier and healthier staff, and the resulting word of mouth that your business is a pleasant place to work in, will make it easier to recruit quality staff.
This in turn is likely to lead to better productivity and a better impression on customers and suppliers alike, helping to build credibility and a responsible image.
A good risk assessment and management policy will save you and your management team from unnecessary stress and worry and distraction from the day-to-day task of running the business.
Before you can manage or eliminate risk, you must first identify it. A good start is to request the free Basic Steps to make your workplace safer pack from the Department of Labour. (Locate your nearest Department of Labour office at www.osh.dol.govt.nz or phone (04) 915 4444).
This pack will help you to identify the risks and hazards in your business. Browse this website too for many industry-specific articles on Occupational Safety and Health (OSH) topics.
- Manage with the help of your staff
As an employer, you are responsible for providing employees with specific training information and printed instructions regarding the hazards they are exposed to and the machinery or equipment you require them to operate. This should include maintenance instructions to keep equipment in a safe condition.
Meet with your staff to draw up a list of possible workplace risks and decide what you want to do with them.
Your choices are to eliminate, isolate, minimise or manage the risk. For example:
- Replacing a slippery floor surface with a non-slip surface eliminates the risk
- Placing a guard around moving parts of a machine isolates the risk
- Making a dangerous goods shed off-limits to all but selected staff manages the risk
- Good safety practices and requiring everyone to wear hard hats on a building site minimises the risk.
- Resource Management Act
The Resource Management Act was designed to promote sustainability in managing New Zealand’s natural and physical resources. It brings together laws governing land, air and water resources and concentrates on the environmental effects of human activities. The RMA sets out how we manage our environment, including:
- Air, water and soil
- The coastal environment
- Noise and light
- Subdivision and land use planning in general.
The Ministry for the Environment is responsible for administering the RMA and ensuring that it is being implemented effectively. Visit the Ministry’s website www.mfe.govt.nz for more details on the Act.
Contacting the planning section of your local or regional council to see if your planned activities will require a resource consent, and the way to go about it.
- Accident insurance
ACC is the sole provider of work injury cover for employers in New Zealand. ACC covers all New Zealanders every hour of every day for personal injuries caused by accident.
As an employer you are responsible for providing workplace accident cover for your employees, and for shareholder-employees. The particular scheme that applies to employers is called ACC Workplace Cover and is paid for by means of a levy (formerly called a premium).
ACC levies are calculated according to your:
- industry classification
- liable earnings (based on your payroll records).
From historical records, ACC determines the risk levels of various industries, and sets the levy rate accordingly.
- Reducing levies
If you join an ACC Workplace Safety Management Practices programme you can reduce your levies by between 10 and 20 percent. You can also reduce levies by joining an ACC Partnership programme. For more details of what is involved, contact ACC for an information pack.
Note that ACC can also penalise workplaces with negligent or poor safety records by adjusting ACC levies upwards.
- Cover for the self-employed
If you’re self-employed, you pay a levy for ACC CoverPlus. This provides up to 80 percent cover of your last year’s earnings in the event of a work or non-work related accident that prevents you from working.
Levies are calculated in a similar fashion to WorkPlace Cover as already outlined. However, if you are earning substantially more in this current year than you did last year, you can apply for ACC CoverPlus Extra. For example, you might have earned only $10,000 last year (and this was an unusually low amount), but are likely to earn $50,000 this year out of your business.
In the event of an injury, 80 percent of $10,000 (what you earned last year) may not be enough to pay your bills. To prevent this possibility, you can negotiate with ACC to pay an extra levy to obtain the CoverPlus Extra service. There are conditions (including being able to prove your higher earnings this year), so speak to your accountant or contact ACC for the ‘ACC CoverPlus Extra’ information booklet.