Everything Kiwi’s need to know about Income Tax Returns

Let’s talk about filing taxes, and before you click off, it’s worth pointing out that this could be the most money-saving five minutes of your year. Filing tax returns and paying income tax can be a bit daunting for many, but this is an essential part of the Kiwi tax system, so it’s important to understand the ins and outs of the process. This article is going to break down everything you need to know about filing tax returns, from what information you’ll need to provide, when you need to provide, and some common pitfalls to avoid when filing your tax return.

Who is required to file tax returns?

First, let’s define income tax. It’s one of the biggest sources of revenue for the government, which provides various services and programmes—education, health, infrastructure, and police, to name a few.

Everyone in New Zealand (NZ) needs to pay tax on income,
no matter if they’re an individual, business, or organisation.

But not everyone is required to file a tax return. For example, if your only source of income is PAYE (pay as you earn) deducted employment income, NZ interest, or NZ dividends, IRD will most likely auto-assess your tax position and let you know whether you are due any refund or you need to pay additional tax. But, if you have extensive NZ investments, it is a good idea to engage a tax expert, like ourselves, as the tax laws surrounding investments are quite vast.

The main groups that need to file include:

1. Self-employed individuals: If you are self-employed, running your own business, or earning more than $200 of untaxed income, you’re responsible for filing a tax return. This includes contractors, freelancers, and sole traders who earn income outside of regular wages or salary. Even if you earn cash income, you must declare it on the tax return.
2. Employees with multiple sources of income: If you earn income from multiple sources (e.g., salary, rental income, or investments), you may need to file a tax return.
3. People with complex financial situations: If you have income from investments, including cryptocurrencies, property, or overseas, you will likely need to file a tax return to ensure all sources are reported.
4. People with deductions or Tax Credits: If you’re entitled to claim deductions (e.g., income protection insurance) or have past losses or imputation credits, you will need to file a tax return to receive the benefits.
5. Rental property owners: If you own rental properties and earn income from them, you are required to file a tax return, even if you make a loss on the property.
6. Overseas income earners: If you receive income from overseas, you are required to report it on your tax return, and you may be eligible for a tax credit to avoid any double taxation.

In the case of a business operating through a different structure, such as a closed company/look-through company, a Trust or a partnership, or investments held in an entity, there’s no escaping this fun yearly event regardless of whether income is generated or not. The entity must file an income tax return each year. The only exception is if that entity is declared and accepted non-active by IRD.

Below is the type of tax return that needs to be filed based on the entity/structure:

• IR3 / IR3 NR – Individual’s Tax Return / Non-Resident Individual TR
• IR4 – Company
• IR6 – Trust
• IR7 – Look-Through Company / Partnership
• IR8 – Māori Authority
• IR9 – Clubs and Societies

Then, of course, there are GST return, RWT/NRWT return, PAYE Return, FBT Return and so on required to be filed by businesses and self-employed individuals when they are registered for such taxes.

When are tax returns and tax payments due?

Filing: Income tax returns in New Zealand (NZ) are due on 7th July each year. This due date is not extended when an individual or entity takes the DIY route, i.e., does not engage an accountant or tax agent. If this deadline is missed, IRD may charge a late-filing penalty. 

Payment: The year-end residual tax is due by the 7th of February each year for DIYers as opposed to the 7th of April if someone engages a tax agent or accountant.

There are many perks to outsourcing your tax filing and accounting to an expert like us—one of the best being an extra eight and a half months to file your tax return and an additional two months to pay! You now have until 31st March to file your return and can delay paying your residual tax until 7th April. Who knew procrastination could be so rewarding?

If your residual year-end tax is more than $5,000, you are required to prepay next year’s taxes in advance. This ensures that you don’t end up with a hefty tax debt at year-end, which helps manage your cash flow. Four methods are available when calculating provisional tax: Standard, Estimation, AIM and Ratio. The most popular option among all is a standard option, which is also the default option – calculated based on the previous year’s assessment and is payable in three equal instalments (two in case of six-monthly GST filers).

The Provisional tax due date for monthly/two-monthly GST filers or someone not registered for GST:

1^st Instalment                 28^th August

2^nd Instalment                15^th January

3^rd Instalment                7^th May

The Provisional tax due date for six-monthly GST filers (coincides with GST payment date)

1^st Instalment                 28^th October

2^nd Instalment                7^th May

It is advisable to contact a tax expert if your business income has drastically changed from previous years or is irregular, if there have been cashflow issues, or if you missed an earlier tax payment, as we may be able to provide you with tailored solutions for your provisional or residual tax payments. For example, the use of tax pooling for missed payments or to delay an upcoming payment for reduced interest and no penalties. We can also help with accounting income method (AIM) or ratio method for provisional tax when suitable.

What information is required to file tax returns?

The information required to file income tax returns is no one-size-fits-all approach. It differs from individual to individual and entity to entity. But in most cases, we require income information, details of expenses incurred to earn that income, and assets and liabilities information. The more expenses there are, the less tax to pay. That doesn’t mean we can claim any expense. No, your Netflix subscription doesn’t count… unless you’re a professional binge-watcher! There must be a nexus between the income earned and the expenditure incurred. Moreover, you’ll need to keep records of receipts, invoices, and logbooks—and hang onto them for at least seven years, as IRD might want to see them if your business ever gets audited.

In this digital day and age, online accounting packages such as Xero and MYOB are quite prevalent. Sharing information when using cloud software is a piece of cake. By the click of a button, we get access to all the information that we require for year-end accounts and tax filing. The good thing is that you only have to do it once.

Common mistakes to avoid when filing tax returns

Claiming too many expenses – Income tax is calculated on taxable profit. There is a subtle difference between accounting profit and tax profit. Accounting profit is calculated by applying accounting principles and financial reporting standards. On the other hand, tax profit is derived from the accounting profit by making specific adjustments, considering tax laws and IRD regulations. For example, claiming more than IRD’s maximum allowable depreciation on fixed assets – if you claim depreciation on a residential building, you need to add it back for tax purposes as you can no longer claim it. Other common examples are entertainment or legal expenses (if more than $10k).

Claiming too few expenses – As opposed to the previous point, there can be instances where tax laws allow for additional deductions compared to accounting profit. For example, low-value asset claim. IRD has allowed claiming 100% upfront cost of fixed assets at the time of purchase for assets less than or equal to $1000. Other examples are home-office claims or mileage claims.

Under-declaring income – As the name suggests, under-declaring income is becoming quite common. It is important to declare income from all sources, regardless of how small they may seem. This also includes any cash income. Another emerging area where this is becoming common is in the Crypto space. If you are actively buying, selling, or mining any cryptocurrency, you would be liable to pay tax on this income. IRD is now getting quite active in this domain with more funding allocated and access to global information to target non-compliance.

Not complying with Attribution rule – The attribution rules, first introduced on 1 April 2000, were designed to prevent individuals from avoiding higher tax rates by routing their personal service income through associated entities like companies, trusts, or partnerships. Attribution rules ensure that the income is passed onto the person providing the services for tax purposes. Some other criteria and exemptions may also need to be considered, so if you think these rules may apply to you, please seek professional advice.

Not complying with more recent changes – NZ tax laws are like New Year’s resolutions – always changing, and we never seem to keep up with them. In the past couple of years, we have seen many changes in the world of tax: ring-fencing of residential losses, changes to bright-line tax, additional disclosure requirements for trusts, and interest deductibility limitations. When you’re not up to date with these changes, which can be quite easy to miss, it can lead to more serious issues like Tax Evasion. That’s why we recommend seeing a professional who can help navigate this ever-changing world.

Refresher on some of the upcoming or more recent changes to NZ tax law

For those who are curious about what’s been happening in the world of NZ tax law, or just need a little refresher on what changes have been and will be made, here’s a list of what you need to know.

1. Rolling back of interest deductibility – Great news for residential rental property investors, the interest deductibility will increase to 80% for 2025 FY then to 100% for 2026 FY.
2. Changes to brightline periods – From 1 July 2024 the bright-line property rule will only apply if the property is sold within 2 years of purchasing it, rather than the outgoing 5- or 10-year periods.
3. Adios to depreciation on commercial buildings – From the 2025 financial year, the tax depreciation rate for commercial and industrial buildings will revert to 0%.
4. Changes to trustee tax rate – The trustee tax rate has been raised from 33% to 39% for the 2025 and later income years if the trustee income exceeds $10,000. For income under $10,000, 33% rate is still applicable.
5. Changes to individual income tax rates – The following income tax rates are applicable from 31 July 2024:

6. Changes to IECT – Independent earner tax credit upper threshold is changing from $48,000 to $70,000 from 31 July 2024. $0.13 per dollar abatement starts from $66,000 to $70,000.

Navigating New Zealand’s tax landscape can feel like a complex maze, but it doesn’t have to be a solo journey. With constantly evolving tax laws, changing regulations, and numerous potential pitfalls, having a professional guide can make all the difference between a stressful tax experience and a strategic financial opportunity.

At Gilligan Sheppard, we help you understand how these changes might affect you and develop a personalised strategy to optimise your tax position and ensure you remain tax compliant. Get in touch with us here to learn how we can help you.