Income Tax Return

Taxable income is governed by Income Tax Act 2007 and is administered by Inland Revenue department. Income tax is filed once in a year, for individuals and most businesses the accounting year begins on 1 April and ends the following 31 March, but businesses can choose a different balance date. Income tax returns are due on 7 July each year, unless you have a tax agent, in which case you get extension of time.

All income is taxed in New Zealand, like many other countries there is no tax-free threshold.  But individuals can get rebates and credits depending upon their personal situation.

New Zealand Tax residents are also required to declare their worldwide income.

Who is required to file Income Tax returns?

Besides business owners, sole traders, companies, trusts and related organisation, anyone involved in earning income not deducted at source must file income tax return and declare their taxable income. If you are a full-time employee but at the same time you run Airbnb/holiday house, drive uber, own a rental property, are shareholder of a company or receive overseas income you need to file income tax return. In addition to above, Inland Revenue Department may ask you to file income tax return for any reason.

How Income Tax Return is prepared

For individuals 

Income from all sources, taxed and untaxed is added up and gross income is considered to calculate income tax.

For businesses and organisations 

After the balance date, your accountant will prepare a set of annual financial statement. There is different rule that govern financial reporting requirement of small and large businesses and .

Income tax return is prepared on the basis of outcome of the financial reports. Small businesses need to file only financial statement summary along with income tax return.

Any provisional tax already paid and tax credits are adjusted at this stage and final income tax payable amount is calculated.

Income Tax return and Business Structure

Sole Trader

If you are operating business as a sole trader i.e., under your name or a trading name, then all business income or loss is treated as a personal income or loss and is taxed at the tax rate for individuals. Sole Traders are required to declare their net taxable income in IR3 return and submit financial statement summary of their business.

Business losses are adjusted against other personal income for a sole trader, and can be carried forward.

Partnership

If you are conducting business with a partner, a partnership business must file an IR7 return showing their total income after expenses, (IR7P) partnership income/loss attribution is also attached.

Partnerships do not pay income tax on their profits. Instead the profit or loss is shared between the partners. The partners pay income tax on any profit, and they can also claim any partnership losses against their other personal income.

Each partner must file individual IR3 return and must include their attribution of the partnership’s income/loss in their individual income tax returns.

Company

Company tax returns and comliance requirements are more complex compared to Sole Trader return. In a company structure Income tax return IR4 is filed for a company, and each director/shareholder need to file a separate IR3 return. The ‘summary of financial statement’ is required to be submitted along with income tax return.

Company are required to maintain imputation Credit account where tax paid by the company is recorded. Annual imputation return is filed which has a fixed balance date of 31st March.

Company losses are carried forward and can be adjusted with next year’s profit if shareholder continuity is maintained. Company losses cannot be adjusted against personal income of directors/shareholders or other income.

Look Through Company

The way of adjusting company losses against shareholders income and other income is to get the status of LTC (Look-through Company). To elect to be an LTC, election form must be sent to Inland Revenue before the start of the income year it applies for.

For income tax purposes LTC is treated like a partnership. Look-through company (LTC) must file an IR7 return showing their total income after expenses and attach the Look-through company (LTC) income/loss attribution (IR7L). The LTC is not assessed for tax, but each owner is liable for tax on their share of income from the LTC.

Each owner must file an individual tax return showing all income, including their share from the LTC. Owners can offset the look-through company’s losses against their other income. They must pay tax on a look-through company’s profits.

ICA and Dividends

ICA- An Imputaiton Credit Account (ICA) is simply a memorandum or record-keeping account that the company maintains. Its purpose is to keep track of how much tax a company has paid, and how much credit for that tax is available to pass on to shareholders.

Companies keep imputation credit accounts to track their imputation credit levels. Certain shareholder continuity requirements have to be met in order to maintain imputation credits.

Dividends -Dividend is a way of distributing companies profit to its shareholders. There is a solvency test that must be satisfied before declaring and distributing the dividend. Solvency test simply means that company can cover all its financial liabilities before paying out to its shareholders.

Imputation credits, if available are attached to shareholder dividends. “Imputation credits” are credits for part of the tax the company has already paid on its profits, which means the dividends aren’t taxed twice. RWT is deducted from your dividend to bring the total credits withheld up to 33% of the gross dividend.

The dividend, together with any attached imputation credit, is required to be included in the income tax return of the shareholder. These credits are then claimed by the shareholders in their tax returns.

Tax Pooling

If you often face difficulty with cash flow and struggle to pay income tax on time, tax pooling might be the answer for you. You can defer tax payments by purchasing back dated tax now. Click below to see the list of IRD approved tax pooling intermediaries https://www.ird.govt.nz/topics/intermediaries/tax-pooling/tax-pooling-intermediaries