Discounted tax for your first year in business

If you’re new to business, you may be eligible for a discount for paying your income tax early. This applies to sole traders, contractors and partnerships.

Start by checking if the early payment discount makes sense for your situation and your cash flow. Then set yourself up with good systems and get your tax ducks in a row. 

How it works

In your first year of business, you don’t have to pay income tax until months after the tax year ends — usually 7 February of the following year, or 7 April if you have a tax agent.

But you may be eligible for a 6.7% discount if you:

  • pay some or all of your income tax before 31 March, and
  • are self-employed or in a partnership (companies and trusts are not eligible for this discount).

The discount can quickly add up:

  • Danny owes $5,000 income tax. The discount saves him $335.
  • Miriama owes $20,000 income tax. The discount saves her $1,340.

Paying tax in your first year of business(external link) — Inland Revenue

Simply filing your tax return early won’t get the discount. Tick the relevant box on your tax return, indicating you’re applying for the discount.

Simply filing your tax return early won’t get the discount. Tick the relevant box on your tax return, indicating you’re applying for the discount.

Work out if it’s right for you

Just because you can pay income tax early doesn’t mean you should. Lisa Martin, former Vice President of the Institute of Certified New Zealand Bookkeepers (ICNZB), recommends doing a cost/benefits analysis to work out which will be better for your business:

  • having cash on hand for longer
  • getting a discount for paying tax early. 

“For example, if you’re the main breadwinner in your family, and you have a revolving credit mortgage, you might be better off keeping the money in your revolving credit account. This saves interest on your mortgage.”

Likewise, if you have a number of business expenses looming, it might make more sense to keep the cash, rather than paying tax early.

Set up the right systems

If you decide to go ahead and pay your tax early, you need be able to correctly calculate what you owe and what you can claim. Setting up the right systems early on will help when it comes to sorting out your taxes. 

“A lot of people just fall into self-employment and don’t take the time to set themselves up properly,” says Martin. 

Even something as simple as setting up a separate business banking account makes a difference. 

“Don’t mix up your business income and expenses with your personal accounts, or joint accounts. It becomes difficult months down the track when you try to sort out what’s business spending and what’s personal.”

Tool: Choose a business structure 

Get an expert on board

When you’re starting out, you don’t know what you don’t know. So it may be tricky to work out how to set yourself up properly. Consider getting expert help from an accountant or bookkeeper, to save time and stress and to get set up properly. 

Among other things, they can give advice on:

  • how to set up a ledger or online accounting software
  • what counts as a business expense
  • what needs go on your balance sheet, eg business assets like computers or tools
  • when/if to register for GST
  • invoicing customers
  • how to claim depreciation on business assets.

They’ll also be able to set you up with an accounting software system. Online accounting makes it easier to track what you earn and what you spend, plus tax to pay and expenses to claim at tax time. 

Once you get a better idea of your income and expenses you can track the money coming in and out of your business, what expenses you can claim and what expenses are coming up, you’ll be better placed to make a decision about whether to pay your tax early. 

How to read balance sheets

Use the guide above for tax-reducing tips on how to:

  • Claim for valid business expenses.
  • Depreciation — claim a deduction on your business assets, eg computers and vehicles, for value lost through wear and tear.
  • Pay on time to avoid penalties — online banking is quickest and easiest.
  • Hire a tax agent — their knowledge can save you time and money.
  • Don’t over-pay — Inland Revenue will refund you but the overpayment interest rate is now 0.00%, meaning you get no extra money.
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