Take the time now to minimise your tax bill for the coming year, and to budget for your upcoming payments.
Your first port of call should be your accountant – get in to see them as soon as possible. It’s important to do this before the end of the financial year. If you don’t, it may be too late to make the necessary changes before the start of the next year, meaning you miss out on potential tax savings.
We know it can be painfully dull seeing your accountant (unless your accountant is us!). However, the sooner you do, the sooner you can start minimising your tax – so don’t put it off! Even if it turns out you’re minimising your tax as much as possible already, at least you’ll have peace of mind knowing you’re doing things correctly.
There are a number of things your accountant can do to help you legitimately minimise your tax bill. Among others, these include the more common home office and motor vehicle expense claims, through to loan restructuring to ensure full interest deductibility.
You also need to talk about asset protection. Depending on how you’ve structured your business, this could involve family trusts, new companies, relationship property agreements and more. As with tax planning, the sooner you sit down with your accountant and work through these issues, the sooner your assets are protected. Also, don’t wait for your accountant to initiate the conversation with you – the chances are they won’t. So take the initiative yourself and get them to come out to you.
After all this tax planning, hopefully you still have some tax to pay – it means you’re making money! The key things are knowing exactly what you have to pay, when it’s due and what financial year the tax relates to. There’s no point incurring IRD interest or penalties, so make sure your accountant provides you with the information you need.
As an example, say you’ve got $15,000 of tax to pay for the coming 2014 financial year (provisional tax), and $8,000 to pay for the past 2013 financial year (terminal tax). The $8,000 of terminal tax needs to be paid by April 2014. For some this due date will be earlier – check with your accountant (and if it’s earlier ask why).
Although it’s not yet due, interest (or worse penalties) may be ticking on the terminal tax. Interest and penalties build up quickly so make sure your accountant explains exactly what it’s costing you to leave the IRD debt outstanding.
The $15,000 of provisional tax needs to be budgeted for from current year earnings, and will be due for payment in three installments (due August 2013, January 2014 and May 2014). It’s important that you put enough to one side throughout the year to cover these payments – budgeting and cash flow management is imperative.
It’s also important to revise these provisional tax payments throughout the year. If it turns out you’re earning less than expected you certainly don’t want to pay the full $15,000 in provisional tax. The strain this would put on your business could be huge. Conversely if you’re earning more than expected you need to know how much additional money you need to put to one side. If you don’t you could be landed with a large terminal tax bill, together with interest and penalties.
Understanding your tax payments and budgeting for them is easy if you have the right information from your accountant. Although budgeting for tax is great, minimising the tax you pay in the first place is better.