Tax Rates for Sole Traders

Introduction: New Zealand boasts a thriving entrepreneurial spirit, with many individuals choosing the path of becoming self employed to pursue their own dreams of success. As a sole trader, understanding the basics of tax rates is crucial for maintaining financial health and compliance with the law. In this article, we’ll delve into the tax landscape for sole traders in New Zealand, exploring applicable rates, deductions, and compliance requirements.

Tax Rates for Sole Traders: Sole traders in New Zealand are subject to income tax on their business profits. The tax rates for sole traders are progressive, meaning the percentage of tax paid increases as income rises. As of the current tax year, the individual income tax rates for sole traders are as follows:

For each dollar of incomeTax rate
Up to $14,00010.5%
Over $14,000 and up to $48,00017.5%
Over $48,000 and up to $70,00030%
Over $70,000 and up to $180,00033%
Remaining income over $180,00039%
(Rates are at the time of this article: Feb/2024)

One pitfall that continues to confuse people of New Zealand is the idea of progressive tax rates. A progressive tax rates means you will pay more tax only on the amount in excess of the previous tax bracket. In simple terms, if you earn $45,000, the first $14,000 you make will be taxed at 10.5%, and the remaining amount of $31,000 ($45,000 – $14,000) will be taxed at 17.5%. So don’t be concerned about earning more and entering a new tax bracket, you will always be better off the more money you earn!

It’s important to note that these tax rates apply to the sole trader’s total taxable income, which includes both business profits and any other sources of income, such as investments or employment. This is a key difference between a company and a sole trader. A company is a separate legal entity and is taxed as such.

Deductions and Expenses: Sole traders in New Zealand are entitled to deduct legitimate business expenses from their taxable income, thereby reducing their overall tax liability. Common deductible expenses for sole traders may include:

  1. Operating expenses: Costs directly related to running the business, such as rent, utilities, office supplies, and advertising.
  2. Vehicle expenses: If a vehicle is used for business purposes, a portion of vehicle-related expenses, such as fuel, maintenance, and insurance, may be deductible.
  3. Depreciation: Sole traders can claim depreciation on eligible assets used for business purposes, such as equipment, machinery, and vehicles.
  4. Home office expenses: Sole traders who operate their businesses from home may be able to claim a portion of home-related expenses, rent, utilities, and internet costs.

It’s crucial for sole traders to keep detailed records of all expenses and ensure they are directly related to the operation of their business. Additionally, expenses must be reasonable and incurred for the purpose of generating income.

GST: If you’re registered for GST, your income tax return will exclude GST on your income and expenses — GST is accounted for in your GST return. If you’re not registered for GST, your income tax return will include GST on your expenses only.

Tax Compliance: Sole traders in New Zealand are required to meet various tax compliance obligations to fulfill their legal responsibilities. These obligations include:

  1. Keeping accurate records: Sole traders must maintain detailed records of income, expenses, and other financial transactions related to their business.
  2. Filing tax returns: Sole traders must file an annual income tax return with the Inland Revenue Department (IRD) by the specified due date, which is usually March 31st following the end of the tax year.
  3. Paying provisional tax: Sole traders with a certain level of income are required to pay provisional tax throughout the tax year, based on their estimated tax liability. Provisional tax payments are typically made in installments, with due dates varying depending on the taxpayer’s balance date.

Failure to comply with tax obligations can result in penalties and interest charges imposed by the IRD, underscoring the importance of timely and accurate reporting.

Conclusion: Navigating the tax landscape as a sole trader in New Zealand requires a solid understanding of applicable tax rates, deductions, and compliance requirements. By staying informed and maintaining meticulous records, sole traders can effectively manage their tax obligations while maximizing opportunities for business growth and success.

Here at Zest we are happy to help you! please contact us today.