There's no getting away from tax
There's no getting away from tax if you're self-employed. As much as I hate clicking on that "Pay Tax" button on my internet banking, it's just got to be done!
It's just not possible to escape tax. Many just ignore it, don't pay it, and let the amount they owe accumulate, in the vain hope it will somehow go away. Another approach is to not to submit any tax returns. This is good for putting off the evil day, but it doesn't help in the longer term and either way, not facing up to tax will, eventually, lead to financial ruin as the amount owed will grow exponentially as the IRD shovel on interest and penalties.
Even if you have a very small or part-time business you're going to end up with a tax bill unless you're making losses. Let's look at the amount of tax you'll end up paying:
| Profits |
Tax due |
Tax % |
| $100,000 |
$23,920 |
23.9% |
| $50,000 |
$8,020 |
16% |
| $20,000 |
$2,520 |
12.6% |
| $10,000 |
$1,050 |
10.5% |
What you'll notice is that although the tax percentage is relatively low, the amount of tax payable is high, because in NZ we have to pay tax on every cent of our income, unlike our friends over the ditch (where they can earn A$18,200 without paying tax) or back in the UK where it's about $20,000 with no tax to pay. And that of course is before you even pay any ACC! So as you'll agree, we get a rough deal in NZ from the tax point of view.
Having said that, ignoring the need to pay for the obvious things like roads and the health and education systems, let's look at some of the reasons why paying tax is actually important from a selfish viewpoint that actually benefits us:
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Protection from the IRD. If you're not paying a reasonable amount of tax eventually you're going to show up on the IRD's radar. A client of mine takes a "two for me, one for the IRD" policy with his jobs such that his reported profit on his Tax Return is only approx. $10,000. Despite that, he has two Ute's, a car, a boat and a sizeable mortgage and no wife. What would you say if you were the IRD?
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Need to make a decent income. If you're not paying tax, it's unlikely you'll be doing well in business. If you're not doing well in business there's little point in continuing right? And it won't surprise you to learn that those with the biggest tax bills enjoy the biggest income. So what would you rather have - a small tax bill or a big one?
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Selling your business. If you're going to put your heart and soul into a business it would be daft not to try and sell your business when you retire. Let's face it, there are few other opportunities to get a sizeable chunk of money! To sell your business for a respectable price you need to be making a good profit. A good profit means paying tax!
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Getting a mortgage or business finance. Gearing up with a mortgage is the only way for most of us to buy our biggest asset, our house. Or maybe you have a house already but need to buy a business or business premises and/or equipment. Either way you can't borrow money if you can't show the bank you can afford to repay the loan which means again, making a good profit. And you guessed it, a good profit means more tax!
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Accumulation of wealth. Unless you can inherit wealth or marry into it, or win the Lotto, it's necessary to build up wealth for retirement or maybe to pass onto the family. If you're in business, to accumulate wealth requires you to be making substantial profits to generate enough cash to save money over and above day-to-day outgoings. You'll have realised by now that this means paying tax!
So all in all, providing you're claiming all possible expenses and have minimised the tax you're paying in all possible ways, perhaps paying tax is a necessary part of life and part of the grand plan to retire comfortably!