Kiwisaver for Business
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
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
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.
Choosing a Business Structure
Choosing a Business Structure
There are four types of legal entity used to own most private businesses in New Zealand: sole-traders, partnerships, companies and trusts. Before choosing your business structure, consider the pros and cons of each below.
Sole Trader
If you start your own business without forming a separate entity, you are automatically a sole trader. Many contractors or self-employed people operate as sole traders due to its simplicity. However, being a sole-trader leaves you personally exposed to all the commercial risks of the business.
I generally would only recommend trading as a sole-trader if your business is very straight forward with very low risks. If your business fails for any reason and cannot pay its debts, you are personally liable. This can result in you losing your assets such as your house and/or being made bankrupt.
Sole Trader Advantages
No formation of a separate entity required
No additional legal administration obligations like a company or trust
If the business makes a tax loss it is automatically offset against your other income, reducing your tax bill
Sole Trader Disadvantages
You are personally liable for all debts and legal problems of the business as there is no legal separation between you and the business
All income is taxed at your personal tax rates which can exceed those of other entities
It is hard to split income with others such as a spouse
If you take on a business partner, you will have to form a new entity, creating potential tax issues when transferring the business and business assets
Partnership
If you start operating a business with one or more others, without forming a separate entity, you are operating as a partnership.
A partnership is like a sole-trader in that there is no legal separation between the partners and the business. If the business cannot pay its bills, the partners are personally liable.
While being a sole-trader carries risks, a partnership multiplies the risks as each partner is joint and severally liable for the results of actions of the other partners. Should your partner run up a large debt in the name of the partnership, the creditor can demand payment from you.
A partnership is a risky business structure. If you are going into business with someone else, I would strongly recommend considering a company structure as below.
Partnership Advantages
Simple to setup and administer
If the business makes a tax loss, it is automatically offset against the partners’ individual taxable income
Partnership Disadvantages
Unlimited legal exposure to the risks of the business and your partners’ business actions
All income taxed at the partners’ personal tax rates which maybe higher than necessary
If one partner leaves the business, the partnership is effectively ceased, and a new entity must take over the business, creating administrative and potential tax
Company
The company has been the business structure of choice for commercial ventures for centuries. A company, or corporate structure, is a separate legal entity that can act as a (non-natural) person forming contracts and owning and operating assets and businesses.
By trading through a company, you are building a wall of protection between yourself and the business. The company owns and operates the business. You, as an owner of the company, have a limited liability investment.
“Limited” at the end of the company name indicates limited liability. The limited applies to the shareholder(s), limiting their liability to the amount of capital they have paid for their shares and they cannot be forced to contribute any more if the company cannot pay its debts. If you form your company with 100 shares paying $1 for each, your loss is limited to $100.
In practice this limited liability is often compromised. Shareholders of small companies often personally guarantee the company’s loans and debts. If the company is formed to run your business, you will also be a director. A company needs at least one personal director who takes on legal duties to manage the company properly and can face liability if they breach these duties. Directors also often give personal guarantees for the company’s debts to suppliers as part of their trade agreements.
Despite the disadvantages, forming a company is often the most effective risk management move when going into business.
Company Advantages
Limits your personal exposure to commercial risks
Allows you to raise funds from investors in exchange for a share in the business
Enables tax-efficient splitting of taxable income
Company Disadvantages
Requires some additional cost and compliance
Brings legal responsibilities to directors
Trust
The final business structure option discussed here is a trust. Trusts are very common in New Zealand for their ability to protect assets.
A trust is not strictly a separate legal entity. A trust is an arrangement whereby one or more people (the trustees) legally own assets for the benefit of one or more other people (the beneficiaries). By forming a trust and transferring your assets into it, those assets are no longer in your ownership. If you go bankrupt, the assets are safe.
Trusts are probably the best vehicle for protecting assets. Commonly, New Zealanders put their house into a trust, especially when they are personally involved in business or other risky ventures. Trusts can also help you to control what happens to your assets and who will ultimately benefit from them.
A trust, subject to the rules contained in the trust’s deed, can run a business. A trust that runs a business is called a trading trust. Trading trusts are not as common as family trusts that own personal assets such as a home and investments. It is more common for a trust to own the shares in a trading company that runs your business. This provides limited liability protection from the business activities and asset protection of the value of the investment in the company.
Trust Advantages
Protects assets from personal risks
Helps control who ultimately benefits from your assets and investments
Allows for tax-efficient distributions of income to people with different tax rates
Trust Disadvantages
Adds complexity to managing your affairs
Means you no longer own the trust property
Can be a complicated method of managing a business if the trust itself runs the business
If trusts are not managed properly, they can be deemed to be a sham and set aside by a court
Business Structure Conclusion
Sole-traders and partnerships are the simplest ways to run a business as they don’t require setting up and managing a separate entity. However, the benefits provided by a trading company will usually outweigh the moderate cost and compliance requirements. A company is generally the preferred vehicle for managing even small businesses.
A trust is probably the best vehicle for protecting assets but is less commonly used to own and operate a business. Trusts are great for protecting personal assets such as homes and investments including shares in trading companies.
Go to the first post in this business basics series
Contact Robb with any questions.
Registering Your New Business with IRD
Registering your New Business with IRD
If you have decided to start a business, your first question may be whether you must register the business with IRD.
Let’s first clarify what a business is. A business is an activity carried on to make money. Your business will be owned and operated by a legal entity such as an individual (you) or a company. It is the legal entity operating the business that must be registered with IRD. The business activity itself cannot be separately registered as it is not a legal entity and therefore cannot form contracts in its own name.
If you start a business under your personal ownership, rather than using a separate entity, you are a sole-trader. You are the legal entity running the business and, so long as you have an IRD number, you are already registered with IRD.
If you form a new legal entity to run your business, such as a company, partnership or trust, that entity will need to register with IRD and get an IRD number.
If the legal entity is not already GST registered, and the new business is expected to sell more than $60,000 of goods or services per year, it will generally have to register for Goods and Services Tax (GST).
Contact Robb with any questions.