Business income tax
- receives business income for the goods and services it sells
- can claim business expenses against its business income to arrive at its net profit (the net profit includes drawings taken from the business)
- pays income tax on its net profit.
Tax payable on income
The rate of income tax that a business uses to calculate the tax it needs to pay to Inland Revenue depends on:
- the type of entity you operate as (partnership, company, sole trader, etc.), and
- the income year.
If you are a shareholder of a company, you may also receive tax credits, such as imputation credits or FDP (foreign dividend payment) credits, attached to dividend income. You can claim these to offset the amount of tax you are liable to pay on that income. For more information about claiming tax credits, see the relevant income tax return guides.
Income tax during your first year in business
- Your first year in business is not tax-free. If, at the end of your first year in business, you have made a profit, you may have to pay tax on this.
- You may choose to make voluntary tax payments during your first year of business, which helps to spread the cost. Some individuals in business, who make voluntary income tax payments during their first year of business, may be entitled to claim an early payment discount.
- If you have not been making tax payments during your first year in business, the tax will need to be paid by 7 February in the following year if you have a 31 March balance date (or, if you have an agent, by 7 April).
- If you want a balance date other than 31 March, you must apply in writing to us stating the reasons why and we will advise you of your new payment dates.
- After your first year in business you may be required to pay income tax in three instalments during the year. This is called provisional tax. For more information see our Provisional tax guide IR289.
- If you are a sole trader and have a student loan, you may also have student loan repayments to make. After your first year you may have to pay interim payments. For more information see our Student loans making repayments booklet IR224 or visit our student loans webpage.
Early payment discount
From the income year beginning 1 April 2005, a 6.7% discount of tax has been introduced to encourage individuals who begin receiving self-employed or partnership income to pay tax voluntarily in the year before they begin paying provisional tax.
To qualify, individuals have to:
- Be either self-employed or a partner in a partnership;
- Derive gross income predominantly from a business (not being interest, dividends, royalties, rents or beneficiary income);
- Not be required to pay provisional tax in the income year;
- Make a voluntary payment of income tax before the end of the income year (31 March for a March balance date taxpayer);
- Elect to receive the discount within the timeframe for filing a return of income for that income year;
- Have not been liable to pay provisional tax in the prior four years;
- Have never received an early payment discount (note however that there is a concession to enable taxpayers to claim the discount again where they have ceased to receive self-employed or partnership income for a period of four years and then begin a new business).
The discount is calculated at the rate of 6.7% on the lesser of the amount paid during the year or 105% of the end-of-year residual income tax liability.
To find out whether you might qualify for the discount, please contact Inland Revenue.
Date published: 12 Mar 2008