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Introduction to business - Income & provisional tax
A transcript of the Introduction to business - Income & provisional tax
Introduction to Business
Income and provisional tax
Inland Revenue's logo appears, together with the series name "An Introduction to Business" below. Next, the title of the video "02 Income & provisional tax" appears.
Three bubbles pop up showing: a question mark, "Income tax" and "Provisional tax".
"An introduction to business. Income and provisional tax. Are you in business for yourself? In this video, we explain how income tax works. You'll also find out if you have to pay provisional tax, which is a way of paying your income tax throughout the year."
Carolyn raises her camera and takes two photos. We see the flashes. A pie chart comes onscreen showing "Gross sales $98K". Then the pie chart is split into segments: "Less expenses $62K" and "Net profit $36K". A message reads "+ any other income".
"Meet Carolyn! She's a photographer, who's just started working for herself as a sole trader."
"In her first year, Carolyn made gross sales of $98,000."
"When you file your tax return, you record your gross sales, then deduct your business expenses. Carolyn's business expenses for the year came to $62,000."
"After deducting her expenses, Carolyn has made a net profit of $36,000. You pay income tax on your taxable income. Your taxable income will be your net profit plus any other income you might earn, like a salary or wage."
Most of the pie chart disappears, leaving the segment "Net profit $36K" to the left of the screen. Coloured strips appear to the right: "$0 - $14,000 10.5%", "$14,001 - $48,000 17.5%", "$48,001 - $70,000 30.0%", and "$70,001 plus 33.0%".
The writing "Net profit $36K" disappears from the segment, which is divided into two. One of the sections is highlighted yellow, matching the first strip "$0 + $14,000 10.5%". The amount $1,470 slides from the segment to the bottom of the page.
Next, the remaining segment is highlighted pink, matching the second strip "$14,001 - $48,000 17.5%". The amount $3,850 slides from the segment to the bottom of the page.
The two figures $1,470 and $3,850 are added together to give total income tax payable of $5,320.
A building labelled "Company" appears alongside a strip reading "$0+ 28%".
"As an individual your taxable income is split into layers, and each layer is taxed at a different rate."
"Let's see what this means for Carolyn. Remember, she earned taxable income of $36,000. The first $14,000 is taxed at 10.5%. So she'll pay tax of $1,470 on this part of her income."
"The remaining $22,000 is taxed at 17.5%. So she'll pay tax of $3,850 on this part of her income."
"Carolyn's total income tax for the year is $5,320."
"That's how income tax works for individuals in business. For companies, it's a bit different. A company's taxable income is taxed at a flat rate of 28%."
"So that's income tax!"
A bubble marked "Provisional tax" appears. Then a segment of a pie chart (suggesting your tax payable) pops up from the bottom of the screen. The segment is split into three sections. Two bubbles appear on either side of the segment: one shows a calendar marked "March 31" and the other shows a piece of paper marked "Tax return".
The tax payable segment is stretched out into a thin band - this is provisional tax "spreading the load".
"Now let's look at part two of this video, provisional tax."
"Provisional tax isn't a separate tax - it's a way of paying your income tax throughout the year. In general, you pay three instalments of provisional tax."
"At the end of the tax year, when you file your income tax return and work out your tax payable, you can deduct the provisional tax you paid earlier. In other words, provisional tax helps you "spread the load"."
A question mark appears, followed by a bubble reading "Residual income tax $5,320". Linked to the bubble is a second, smaller bubble reading "More than $2,500". Next, the wording in the smaller bubble is replaced with "Less any tax credits".
This section finishes with the heading "Standard and the Estimation".
"Who has to pay provisional tax? Anyone with residual income tax to pay of more than $2,500. Residual income tax is tax on taxable income less any tax credits you may have. For example, P.A.Y.E. on your salary or wage."
"There are two main ways to calculate provisional tax: the standard option and the estimation option."
The heading "Standard" remains onscreen by itself. A bubble reading "Residual income tax" appears and then a second bubble "+ 5%" is linked to it.
Carolyn's income tax payable of $5,320 is shown. It increases by 5% to $5,586, which is divided by three to give Carolyn her provisional tax instalments of $1,862.
"If you choose the standard option, your provisional tax equals your previous year's residual income tax plus 5%. Carolyn's income tax payable was $5,320, so her provisional tax for her second year is $5,586. She divides by three to give the amount of each instalment."
"That's how you calculate your provisional tax using the standard option."
The word "Estimation" appears and an arrow pointing downwards moves down the screen.
Carolyn is pictured holding her baby. A downward-pointing arrow shows her income is expected to drop. The word "Estimation" appears at the right of the screen.
"Budget" appears in a bubble, to be replaced by "$23,000". Tax of $3,045 is divided by three to give provisional tax instalments of $1,015.
The message "Estimate carefully" follows, with two bubbles showing "Interest" and "Penalties".
"When might you choose the estimation option? If you think your income for the coming year will drop."
"Suppose Carolyn has a baby, and she plans to spend less time working in her business during her second year. Because she expects her income will drop, she chooses the estimation method to calculate her provisional tax."
"After preparing a budget, Carolyn works out her taxable income in Year 2 will be $23,000."
"Tax on $23,000 is $3,045."
"Carolyn divides by three and sees that for her second year of business she'll need to pay three provisional tax instalments of $1,015."
"Please estimate your provisional tax carefully. Interest and penalties may be charged if your estimate is too low."
A timeline is added to the bottom of the screen, showing Year 1, Year 2, and Year 3. Arrows, showing dates, drop down from the top of the screen: 28 August, 15 January, and 7 February (Terminal tax) land on "Year 2", and 7 May lands on "Year 3".
The timeline disappears and bubbles fade in: "Budget", "In full and on time", "Interest & penalties", and a cellphone. The cellphone sends Inland Revenue a message.
"When do you pay your instalments? Let's look at a timeline."
"If you have the standard balance date, your first instalment towards your tax for Year 2 must be paid by 28 August. Your second by 15 January."
"7 February is the due date for your end-of-year income tax for Year 1."
"Your third and final instalment of provisional tax must be paid by 7 May."
"Please include your provisional tax payments in your budget, so you can pay in full, and on time."
"Interest and penalties may be charged on any late payments. If you can't pay, contact us before the due date."
The closing sequence. Inland Revenue's website address is shown, and useful information on the website is listed below: Provisional tax guide (IR289), the Tool for business, and Tax on annual income calculator. Then Business.govt.nz's website is shown.
The video ends with Inland Revenue's logo and web address, and a footer reading "New Zealand Government".
"Visit our website for more information."
"You can read our Provisional tax guide or search for a specific topic of interest. Our tax calculator can work out your income tax for you."
"Go to business.govt.nz to access further tools and resources for starting in business."