Kiwisaver for Business

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Kiwisaver for Business

As at 31 Mar 2017, 2.7 million people had Kiwisaver accounts with a total of $41 billion invested. As a Kiwisaver investor, in exchange for tying your savings up until you’re 65, the government contribute up to $521 per year to your account. If you are an employee, they also force your employer to match your contributions up to 3% of your gross salary.

It is a good deal for employees, but what does it mean for you if you’re running your own business?

Self-Employed Kiwisaver Accounts

If you are not receiving a PAYE deducted salary, you can still invest in Kiwisaver. You can open a Kiwisaver account with any provider of your choice and pay as much as you like directly into it. For each dollar you invest up to $1,042.86 per year ($20 per week), the government contribute 50 cents. That is $521.43 per year from the government. In my view, it is silly not to take the free money.

The Kiwisaver year runs from 1 Jul to 30 Jun. You can either pay regularly throughout the year or in an annual lump sum. Just make sure you pay in at least $1043 between 1 Jul and 30 Jun each year to receive the government contribution you’re entitled to.

Paying Yourself a PAYE Deducted Salary

When Kiwisaver first started in 2007, there was some benefit to self-employed people to put themselves on PAYE and make the employer and employee Kiwisaver contributions. The government paid $20 per week towards the employer’s contribution. That has gone now, and any employer contributions are a direct cost to the business.

While the employer contributions are a tax-deductible expense, the employee is tax on them. The employee is effectively paying their net income into the fund. The overall effect for a business owner-operator paying themselves, is a tax-deductible cost to the business and an after-tax contribution by the employee. If the business has a higher income tax rate than the individual, the business’s tax deduction for the contribution cost will outweigh the employee’s tax deduction taken from the contribution. Other than that possible tax rate mismatch, there is no overall net advantage. Given that the individual will often have a higher tax rate than the business anyway, there is usually no advantage in paying into Kiwisaver via the PAYE system.

Kiwisaver Contributions on Staff Wages

If you are employing staff, you must match their Kiwisaver deductions up to 3% of their wages. An employee can choose to pay up to 8% of their wages into Kiwisaver but the employer only matches the first 3%.

The employee’s Kiwisaver deductions are deducted along with their tax. The employer contributions are added on top and both are paid to IRD along with the other PAYE deductions. For small businesses, this is all due on the 20th of the month following the pay.

ACC for Business

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ACC for Business

What is ACC?

ACC (Accident Compensation Corporation) is a government entity that provides no-fault accident insurance cover for everyone in New Zealand.

If you get injured in an accident, ACC will pay for your treatment and care, and will pay you compensation for loss of income if your injury prevents you from working.

You help fund ACC by paying levies, like insurance premiums.

ACC Levies

Levies are charged on money earned by individuals through personal efforts. This includes wages and business income but excludes passive earnings such as interest, dividends or rents.

The two main levies paid are work levies and earner levies.

Work Levies

Businesses pay work levies to fund ACC’s work account which covers work-related injury costs. Businesses pay a specified rate (percentage of their workers’ wages) which depends largely on the risk of its industry. Income from high-risk manual labour is levied at a higher rate than safer office-bound work.

Earner Levies

Individual workers pay earner levies to fund ACC’s earner account which covers non-work-related injury costs. The rate is the same for everyone, being 1.39% of earnings for the 2018/2019 year.

Employees earning PAYE deducted wages have earner levies deducted as part of their PAYE. This is paid by the employer to IRD who forward it to ACC.

Self-Employed

Businesses pay both work levies and earner levies on the income of self-employed and shareholder employees who do not pay PAYE.

When a business, whether it be a sole-trader individual or a company, files an income tax return, the amount of active income included in the return is passed by IRD to ACC. ACC then invoice the business.

New businesses will receive their first invoice after their first income tax return is filed.

ACC Invoices

When an employer pays PAYE deducted wages, ACC invoice the business for the work levy on those wages.

When a business has earnings with no PAYE deducted, ACC invoice the business for both the work levy and earner levy. For a sole-trader, this is based on the business income returned in the sole-trader’s individual income tax return. For a company, this is based on the shareholder salary information included in the company’s income tax return.

ACC charges provisional levies, based on expected earnings before the year is finished, and final levies based on the actual earnings after the year is done after adjusting for provisional levies already paid.

Injury Cover

ACC pay for treatment and other required care for injured people. They also pay income replacement of 80% of the injured person’s income, subject to a minimum and maximum amount, if the injury prevents the person from working. If an individual with a salary of $100,000 cannot work following an injury, ACC will pay them $80,000 until they can work again. The payments are subject to PAYE.

The employer must pay the employee the 80% for their first week off work. After that, ACC take over.

Minimum Earnings

A minimum income is set for fulltime workers for ACC purposes. If a worker earns less than the minimum, ACC levies and compensation are based on the minimum which, for the 2018/2019 year, is $32,760 per year.

Maximum Earnings

There is also a maximum income for ACC purposes. A worker will only pay levies, and receive compensation if injured, up to the maximum amount. For the 2018/2019 year it is $124,053.

The minimum and maximum amounts increase annually with inflation.

First Year of Business

If a newly self-employed person cannot work due to injury, they must prove their income to receive 80% of their actual earnings. This can be difficult if they are yet to file an income tax return. Until they convince ACC of their earnings, they will only receive the minimum cover. For new business owners, ACC’s Cover Plus Extra can solve this.

Cover Plus Extra

ACC’s standard cover discussed so far is called Cover Plus. Cover Plus Extra is an optional alternative that acts more like private insurance.

Under Cover Plus Extra, a self-employed person chooses a fixed level of income cover within an allowable range. For the 2018/2019 year, the minimum cover is $26,208 and the maximum is $101,029. These figures are based on 80% of the previous year’s minimum and maximum earnings figures used for ACC Cover Plus calculations.

Cover Plus Extra levies are fixed and compensation if injured is fixed. No proof of actual earnings is needed. This can be especially useful before the newly self-employed.

Some self-employed people choose the minimum income cover and use the money saved on levies to purchase other private insurance to top-up their cover. The private insurance could include other benefits such as cover for illness as well as accidents.

Contact us for more information.

An Example Business Structure

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An Example Business Structure

Clive and Carla

Clive is escaping the corporate world after 20 years as a marketing executive to become a freelance consultant. He is leaving the world of high cost marketing campaigns to help small business owners build brands on a budget.

Clive’s wife Carla is a qualified accountant and will help with the business admin and finances in whatever time she has left after looking after their two preschool kids.

Their only major asset is their home with a mortgage to service.

How should they structure their affairs?

Their Questions

Clive and Carla have three criteria:

  • Risk – They don’t want to lose their house if things go badly.
  • Tax – They want to ensure they can pay their tax, without paying too much.
  • Complexity and Cost – They want to keep things as simple as practical and their costs to a minimum.
    With some research and advice, they have come up with a plan.

Business Risk

They know that business is risky and insurance won’t cover them for everything that may go wrong.

To protect themselves from potential liability to the business risks, they decide to form a company. They incorporate Clive’s Consulting Limited to own and run the business.

Clive and Carla are both shareholders (owners) of the company. As it is a limited liability company, the most they stand to lose is a nominal amount of, say, $100 they will pay for their shares. The company takes the risks, not the shareholders.

The company needs at least one director who will have responsibilities to manage the company and comply with company law. As Clive is primarily running the business, doing deals with clients etc., he will be the sole director. Directors can be personally prosecuted if they do something reckless, so they don’t see any need to expose Carla to those risks.

Protecting Personal Assets

They’re happy that the company will reasonably contain the business risks, but their biggest fear is losing their house. What if Clive is help personally liable for failing in his director’s duties and sued for millions?

Owning their home in their personal names is always going to leave it vulnerable to their personal risks which may or may not be related to the business. Personal disputes with neighbours or causing a forest fire could leave them with a liability they cannot pay.

They decide to form a trust and transfer the house into that. Once the house is owned by the trust, it is no longer in their ownership and so is out of reach of their potential creditors.

Confident Clive has plans to grow his new company into a high value investment that he can sell in the future to fund a comfortable retirement. As they now have a trust to protect their assets, they decide to put the company in their too.

On the advice of their accountant they form their company with 100 shares. 98 shares will be owned by the trust and one share each by Clive and Carla. Holding a share in each of their personal names gives them the flexibility to pay themselves shareholder salaries from the company without deducting PAYE.

Tax

Clive is confident he can generate fees of around $130K with business expenses of $30K, leaving $100K profit in his first year of business. So how will that be taxed?

A company is a flexible vehicle for managing income tax, splitting the $100,000 profit between the company, Clive and Carla.

Clive and Carla need money to live on. As shareholders, they can take money out of the company during the year to live on. They won’t pay PAYE on this as they will take it as drawings which is effectively a loan from the company. They will be taxed on their “shareholder salaries” determined at the end of the year.

Let’s assume Clive’s confidence is justified and he does make $100K profit in year one. Once the year has finished and the profit is calculated, shareholder salaries are worked out.

Carla’s Tax

Carla has worked a few hours a week. They have worked out a fair market value for this work is $20K. This becomes her shareholder salary which is an expense in the company accounts and income to Carla. The company deducts the salary expense reducing its profit to $80K. Carla’s tax return is filed, and she pays tax on her $20K income. Her tax is calculated at her individual tax rates being 10.5% for the first $14,000 of annual income and 17.5% on her next $6,000. Her tax on her $20K salary comes to $2,520.

 

 

 

 

 

 

 

Clive’s Tax

Clive has generated most of the profit through his personal efforts. His shareholder salary must reflect that, so they allocate him $70K. Clive pays tax of $14,020 on this, calculated at his individual tax rates as follows:

 

 

 

 

 

 

 

Clive’s Consulting Ltd’s Tax

After paying the shareholder salaries, the company is left with a taxable profit of $10,000 ($100K – $20K – $70K).

The company will pay tax of $2,800 being $10K times the company tax rate of 28%.

Tax Efficiency

Overall, they will pay $19,340 tax, an average rate of 19.34% on the $100K taxable income. They could save tax by paying a higher salary to Carla and less to Clive. Carla would pay 17.5% tax on additional income up to $48,000, while Clive would save 30% tax by reducing his income. However, if the shareholder salaries do not reflect the actual market values of the services provided, IRD could see it as tax avoidance and disallow the income split.

If Clive was operating as a sole-trader rather than through a company, he would be personally taxed on the whole business profit. At $100K, his tax would come to $23,920, an average rate of 23.92%. This is because any additional income over $70K is taxed at the top personal tax rate of 33%. With the company setup, this additional income is split between Carla’s tax rates of 10.5% and 17.5%, and the company rate of 28%.

Sole-Trader Tax Calculation

As a sole-trader, the business could still pay Carla some income. However, Clive would have to register as an employer and get permission from IRD to pay a wage based on the value of Carla’s work. The business would have to deduct and pay PAYE monthly.

Compared to a sole-trader setup, the company provides more flexibility and lower overall tax.

Cost and Complexity

Clive and Carla have a small business and a house. It doesn’t justify or require a large complex structure. What is involved in this structure.

Forming the Company

Incorporating a company in New Zealand is quick and cost-effective. Clive and Carla should be able to get an accountant to setup their company, including the required IRD registrations and preparing the initial company minutes and registers, for around $500.

Forming the Trust

Setting up a trust is more complicated. A trust deed will be drafted detailing who will manage the trust (the trustees), who will benefit from the trust’s assets (the beneficiaries), and the rules for running the trust. Presuming they use a lawyer to draft this deed, it may cost them between $1,200 and $2,400. Moving the house into the trust will incur some additional conveyancing fees of, say, a few hundred dollars.

Ongoing Requirements

Clive, as director of the company, must ensure it meets its statutory obligations. This includes preparing:

  • Annual financial statements
  • Income tax returns
  • Shareholder and director minutes

Generally, these will all be completed by an accountant as part of an annual compliance job. The business would require financial statements in some format whether it was owned by a company or not.

The ongoing trust management should require minimal work. The trust will only need to file a tax return if it receives taxable income from any source. Just owning the house and company shares will not require a tax return.

An annual trustee meeting and recording of minutes will normally suffice.