Compliance with the IRD is crucial for the smooth operation and success of your business in NZ. IRD is the regulatory body that ensures all businesses adhere to the country’s tax laws and regulations.
With this article, we aim to provide you with an in-depth look at the essentials of IRD compliance for NZ businesses while we also learn about key tax obligations, filing deadlines and why you must keep accurate records of your concerns
The IRD has created specific tax obligations that all businesses operating in New Zealand must adhere to. These obligations include income tax, Goods and Services Tax (GST), and Pay As You Earn (PAYE) for employees. When you have complete knowledge about these, you avoid penalties and make sure your business is running smoothly
Here are key notes or tax obligations to which every business in NZ must remain compliant under IRD regulations
Fringe Benefit Tax (FBT): Businesses may need to register and pay FBT if they provide certain benefits to their employees, such as company cars, health insurance subsidies, or discounted gym memberships.
Remember to file your tax obligations and other details by the date mentioned below
Income tax is an important tax obligation for businesses in New Zealand. Business owners are expected to understand their taxation obligations and must adhere to them promptly to avoid getting penalised.
Businesses are expected to calculate and pay income tax on the profits their business makes. The tax rates and thresholds vary depending on the business structure such as sole traders, partnerships and companies. Let’s understand what is a sole trader, partnership and company, and the difference between them in tax rate.
Running a business as a sole trader means you’re the sole owner and operator. All business income you earn is reported on your personal tax return. The tax rate you pay depends on your total income, Personal income tax has progressive tax rates, the minimum is 10.5%, the maximum can be 39%
If you choose a partnership structure, you’re joining forces with one or more individuals to co-own and run a business.
A partnership firm doesn’t pay income tax, instead, each partner pays individually based on their share in the partnership’s income
A company is a separate legal entity from its owners. This means the company has its own rights and obligations, distinct from those of the individuals who own it.
Companies pay tax at a flat rate of 28% on their profits and are required to file their annual income returns with the IRD
GST is a value-added tax that is applied to most goods and services sold in the country. Businesses need to know about GST registration requirements and compliance procedures to avoid any undue penalties.
Any business that has an annual turnover of NZD 60,000 or more must get their GST registration done. Businesses with lower turnovers are encouraged to register too.
IRD gives the option to file GST monthly, bi-monthly or six-monthly as per your business’s turnover and preference. One thing to always remember is to keep the accounts and records accurate and file for GST on time for compliance with IRD.
PAYE (Pay As You Earn) is a system used by IRD to collect income tax from employees’ wages directly. Employers are asked to deduct PAYE from the wages and remit the same to the IRD.
Every employee has a tax code that determines the correct amount of PAYE tax to be deducted from the employee’s wages or salary.
This tax code is important as it ensures the correct amount of PAYE tax is deducted from an employee’s earnings. The codes are determined by factors like an employee; ‘s income level, main income or secondary income, and any other deductions (e.g. student loan).
Common tax codes include “M” for primary income earners, and “S” for secondary income. Employees are expected to provide the correct tax code to their employers according to an IRD tax form – IR330. An appropriate tax code will ensure compliance with IRD regulations and accurate tax deductions.
It is the responsibility of the employers to calculate and deduct PAYE from every employee’s wage. It must include
In addition to the core tax obligations, businesses in New Zealand may also be liable for Fringe Benefit Tax (FBT). This applies if you provide certain benefits to your employees, such as company cars, health insurance subsidies, or discounted gym memberships.
Record keeping is a vital component of any tax accounting procedure, and it must comply with IRD too. Businesses are expected to maintain accurate records of all financial transactions in a comprehensive manner and must make these records available as and when asked for an inspection.
There are many software in the markets that can help you simplify record-keeping and ensure accuracy. Popular among those are Xero, MYOB and QuickBooks. These days a lot of these tools come with AI and automation features that make your tax accounting process smoother.
An IRD audit can be a daunting experience for businesses. Understanding the process and being prepared can help manage audits effectively.
An IRD audit is a thorough process where the department will ensure your business will comply with the tax laws. Here are step by step details of what to expect.
You will receive a letter or phone call from the officials at IRD informing you about an audit. This notification will outline the scope of the audit, the periods for which the audit is being conducted and any specific records or information needed
You will have to collect all the requested records, tax returns, invoices, bank statements and other relevant documents. Ensure everything is well-organised and accessible for the smooth audit process. Here you can consult an accountant or tax advisor like us to guide you through the process.
An initial meeting is arranged with the IRD auditor to discuss the process and clarify any queries. The auditor will explain the audit plan with a timeline, procedure and any specific area of focus.
The audit can happen at your business premises or at the IRD office, where they will review financial records, tax returns, and supporting documentation in detail. They may also ask for an interview with you or your staff to gain a better understanding of the business operations and financial practices.
They will verify the financial records against the tax returns filed for accuracy and completeness. They will also ensure that all tax laws and regulations are adhered to including correct filing, tax payments and up-to-date record keeping.
The auditors will let you know their preliminary findings and highlight any discrepancies or issues they came across during the audit. After which you will have an opportunity to explain, provide additional documentation and issue clarification regarding the issue raised.
A draft audit report is prepared that summarises the findings, issues and proposed adjustments to your tax filings. You will be allowed to review the report and provide feedback or additional information addressing the discrepancies.
After your feedback, the auditor will finalise the audit report that will outline the findings, any adjustment to your tax liability and the next steps to resolve the outstanding issue.
If the report states an additional tax owed, you will have to make the payments. If an overpayment is identified then you are entitled to a refund. The IRD may also impose penalties and interest on underpaid taxes that are identified during the audit.
Post audit you are expected to implement any recommended compliance measure to avoid future issues. The IRD may also schedule follow-up reviews to ensure ongoing compliance with tax obligations.
These steps in an IRD audit process will help you prepare effectively and navigate the process with confidence. During the process be organised, cooperative and transparent to make the whole experience smoother as it will help you address the compliance issue faster. Or choose to voluntarily disclose any discrepancy or issue that might arise while filing the returns
Non-compliance with IRD regulations can result in severe penalties and consequences for businesses.
It can also lead to legal action, fines and damage to the business’s reputation. It may lead to substantial financial loss too.
IRD always provides various resources to assist you and your business in compiling with tax regulations. Here, tax advisors and an accounting firm can help you in ensuring compliance.
You can check for IRD guides, online services and support that can help your business understand and meet the tax obligations.
Professional tax advisors and accountants like PAS 2008 can provide expert advice, assist with tax planning, and ensure that businesses comply with all IRD requirements.
For any successful business to operate and grow in New Zealand compliance with IRD regulations is a must. With an additional understanding of the key obligation, a perfect record maintained and seeking professional advice can help you run your business in tandem with the IRD and avoid penalties. You can get in touch with us to understand the IRD tax obligation better now!
Premium Accounting Solution is an accounting firm established in 2008 with a team of financial business advisors and chartered accountants in Auckland. Our company is committed to servicing the New Zealand community by helping business owners meet their needs and goals.
