How to reduce your tax bill
Many of the business expenses you face can be deducted from your income when calculating your tax bill. Here are steps you might be able to take to reduce the amount of tax you need to pay.
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Guide to reducing your tax bill
Reducing your tax bill
The steps below expand on what's in our visual guide above.
Your tax bill is calculated on your net profit. You can reduce your tax bill by claiming as many valid business expenses as you can. You’ll need to keep good records, eg receipts and log books, and hold onto them for seven years — Inland Revenue will need to see these records if you’re audited.
Consider hiring a tax agent. Their knowledge could save you time and money.
File and pay on time
This avoids any risk of having to pay interest or penalties.
If you’re worried you may miss a payment date, call Inland Revenue on 0800 377 772 to discuss what support might be available.
What to do
- Paying by online banking is quickest and easiest.
- In your first year of business, you might get a discount if you voluntarily pay tax before the end of the tax year.
- Visit Inland Revenue’s website to apply for an instalment arrangement if you’re unable to pay.
Apply for an instalment arrangement(external link) – Inland Revenue
What not to do
DO NOT pay tax late. Penalties might be more than what you owe.
DO NOT overpay tax. Refunds include interest, but at a lower rate than you’ll get in a savings account.
If you want to start a business — or become self-employed — close to the end of the tax year, wait until the new tax year to save on paperwork.
Each tax year ends on 31 March and starts 1 April.
Claiming expenses
At tax time, your total profit (the amount you need to pay tax on) is your income minus the expenses you can claim — so the more you can claim, the less tax you have to pay.
Many of the costs involved in running a business can be claimed. You might be able to claim some household expenses if you work from home.
What to do
- Keep all expense receipts and invoices you receive.
- Try to pay for anything that could be a claimable business expense through your business account, so you've got a paper (and electronic) trail.
- Keep records of all your expenses — you have to keep these records for seven years.
- Entertainment expenses can be 50% or 100% deductible, so check with Inland Revenue.
- You'll claim your expenses as part of your tax return by entering totals into the relevant boxes. You don't need to provide the receipts with your return, but you need them on hand if Inland Revenue wants to see them.
What not to do
DO NOT claim full travel costs if your trip mixes work and personal time. Only claim the business portion.
Vehicle expenses
Claim full running costs if the vehicle is used strictly for business. If it’s your own vehicle, you can still claim running costs for your work use.
What to do
Work out your business use by either:
- Record actual running costs — but business-use expenses are limited to 25% of actual costs.
- Keep a log book for at least 90 days every three years, showing distances, dates and business reasons.
- Use the Inland Revenue mileage rate.
What not to do
DO NOT claim costs on your GST return if you use the Inland Revenue mileage rate.
Mileage rates(external link) — Inland Revenue
Expert view
How to minimise your tax
“In my experience small businesses want to pay the amount of tax that they have to pay but no more, no less,” says tax expert John Shewan, formerly of PwC.
There are legitimate ways to minimise the tax you pay, he says. How best to do this will depend in part on your business structure — sole trader, partnership or company.
“Make sure your business structure lines up with you own personal family circumstances and with your commercial objectives. What I mean by that is you don’t want to rush off and form a company unless you really have to. It may well be best just to operate as sole trader.”
Make sure you claim all the business expenses you’re entitled to, and also consider how you structure your debts — interest from business loans is tax deductible.
“One of the most common mistakes I see small businesses making is to have their own private debt against their property [eg a home mortgage], but they have equity, their own money, tied up in their business.
“They’re better to try and structure that in a way that ensures they match their borrowings against their business assets and can deduct the interest. That can save them up to a third of the interest cost.”
Make sure you only claim business expenses — not personal ones.
And keep good records of what you spent the money on for your business.
Depreciation
Depreciation is a way of claiming back some money on assets you buy for your business, like computers, vehicles or machinery. You claim for the amount it depreciates each year — that is, the value lost through wear and tear or becoming out of date.
Claiming depreciation is generally compulsory — tell Inland Revenue if you decide not to for a particular asset.
What to do
- Keep all receipts and invoices related to any depreciable assets.
- You can claim it on software, your website, and some intellectual property.
- Group low-value items bought together, eg five x $200 chairs = $1,000 asset.
- Keep an accurate record of your fixed assets, the depreciation claimed and the adjusted tax value of each asset — keep these records for seven years.
- You'll claim for depreciation as part of your end-of-year tax return.
- There are two calculation methods. Pick one for each asset and stick to it. See Inland Revenue’s depreciation rates guide.
Depreciation rates guide (IR265)(external link) — Inland Revenue
What not to do
DO NOT forget to keep clear records if an asset is used privately and for business.
Depreciation(external link) — Inland Revenue
Deductions or tax credits for donations
If your business is registered as a company or Māori authority, you can deduct the amount of any charitable donation from your income.
If you’re an individual, whether an employee or a sole trader or through partnership, you can’t claim an income tax deduction for a charitable donation. Instead, you may be able to claim a donation tax credit.
What to do to claim donation tax credits
- Keep any receipts for donations you make over $5
- Claim the tax credit — this is a separate claim to your income tax return
- Use the link below to submit the donation receipts online
Submit a donation receipt(external link) — Inland Revenue
- If you wish to submit the receipts offline, you can use the following form:
Paper-based form for donations(external link) — Inland Revenue
How can individuals claim tax credits for donations(external link) — Inland Revenue
