Have you started a new business? Do you know your tax requirements? Thought about GST? What about ACC? Here are some key requirements to be aware of in your first two years of business.
When you start a new business, there is a lot to keep up with – often you will have a lot of money going out, and there is a delay before the money starts. Depending on your industry, you will have assets to buy before you can even start trading, and then you will also need to fund a month or more of running costs before the income starts rolling in.
This second part – the running costs – is where small start-ups often feel the pinch. You may have had the funds to buy the assets either through savings or by drawing down on your mortgage, but the amount of running cost that you will need to fund before the business starts making money is a bit of an unknown.
A simple cashflow forecast can help – and will give you certainty around how much you need to have set aside to get through that first period.
That is where your accountant comes in. We can help you to develop and manage a realistic forecast using our knowledge of start ups and industry experience. We can also help with funding applications to the bank.
Goods & Services Tax
Many new business owners have questions about Goods & Services Tax (GST) – do I have to register? Is it beneficial to register? What are my compliance requirements like if I do?
The simple answer is that you are required to register for GST if you carry out a taxable activity and either have sales above $60,000 per year, or add GST to your sales prices. But there are a whole range of businesses that don’t quite fit those criteria.
The first question is: what is a taxable activity? If you provide goods or services to other people in exchange for money, you are probably undertaking a taxable activity. It is easier to look at the exceptions: if you are providing financial services, residential rentals, or fine metals, you are providing exempt supplies and may not be required to register for GST.
The second part is not always simple either. Many small businesses do not know what their sales level will be. If you aren’t going to exceed the $60,000 threshold for a few years, you need to consider whether you are better to register straight away or wait until you are close to the threshold. There are several factors to consider – will having GST added to your prices affect your customers, or are they mainly GST registered businesses? Do you have a large amount of equipment to purchase to start your business, where getting the 15% GST refund would ease cashflow?
Because each business is different, we recommend having a chat to a tax advisor about your specific circumstances and requirements.
The Second Year Crunch
You have made it through your first year of trading and you are feeling good! You get your first set of financial statements prepared, and you are presented with a tax return… and the tax to pay is so much more than you expected. Once the tax return has been filed you receive another bill, from ACC this time.
The second year is tough because you will pay your income tax and ACC from year one, and you are also required to pre-pay your tax and ACC for year two. Effectively you are paying two years’ taxes in one year. This comes as a shock to many new business owners, especially when you have been reinvesting all your cash into growing the business and there isn’t much to spare.
This is something to be aware of from day one in business, so that you can ensure that you set aside enough savings to cover these bills. Engaging an accountant from the beginning is key – we can help you to prepare a forecast of taxable profits and cashflow, which includes those lumpy tax payments. We often discuss keeping a percentage of your sales income aside for tax, which we customise for each business. We can keep in touch during the year and update the forecast, which is essential in your first year as the situation can change rapidly.
What if you are at year two, facing these unexpected bills? We can still help: a good accountant can manage the relationship with IRD and help you with repayment plans. We also have access to a form of tax funding called tax pooling, which gives you an effective extension of time before you need to pay tax.