Understanding Business Income Tax

Calculating Taxable Profit

A business pays income tax on its profit, which is the amount remaining after deducting business expenses from revenue.

Calculating Taxable Profit Example:

Revenue: $150,000
Less Expenses: $50,000
= Profit: $100,000

Revenue is the money earned from business activities, primarily from sales of services or products. Expenses, which can be direct (e.g., purchasing products for resale) or indirect (e.g., rent, administrative salaries), are deducted from revenue to determine taxable profit.

Understanding Income Tax Rates

Different entities have different tax rates:

• Companies pay a flat rate of 28%. (See the IRD website for more details).
• Individuals pay rates ranging from 10.5% to 39%, depending on income levels. (See the IRD website for more details).
• Trusts must pay tax on any income that your trust does not distribute to beneficiaries. If your trust earns $10,000 or less in a tax year, you’ll pay at a 33% rate. If your trust earns any more than that, you’ll need to pay 39%. (See the IRD website for more details).

Calculating Income Tax Example for a Company

Profit: $100,000
Tax Rate: 28%
Tax Payable: $28,000

Calculating Income Tax Example for an Individual

Income Tax Rates for Individuals – From April 2025

For each dollar of income

$0 – $15,600 – 10.5%
$15,601 – $53,500 – 17.5%
$53,501 – $78,100 – 30%
$78,101 – $180,000 – 33%
$180,001 and over – 39%

Example Calculation for an individual earning $80,000:

$0 – $15,600 @ 10.5% = $1,638
$15,601 – $53,500 @ 17.5% = $6,632
$53,501 – $78,100 @ 30% = $7,380
$78,101 – $180,000 @ 33% = $627
Total Tax Payable $16,277

Now you understand how tax is calculated, however, it’s also important to understand how tax is paid.

There are three terms used when referring to paying income tax – Residual Income Tax, Provisional Tax and Terminal Tax.

The amount of $16,277 we calculated above i.e. the amount of tax owed for an income year, is known as Residual Income Tax.

This is paid to the IRD by making Provisional Tax payments throughout the year and/or a Terminal Tax payment at the end of the year.

Let’s look at this a little more closely below…

Understanding Residual Income Tax and Terminal Tax

Residual Income Tax (RIT): This is the total tax payable for an income year.

Terminal Tax: This is the final payment to settle the year’s tax, calculated by deducting any provisional tax paid from the Residual Income Tax.

Provisional Tax: In New Zealand, you need to pay provisional tax if your residual income tax (RIT) is more than $5,000. Provisional tax helps spread the tax burden throughout the year, rather than paying it all at once as terminal tax. (For more information on Provisional Tax, check out our article: Provisional Tax Explained)

Example:

Residual Income Tax: $16,277
Provisional Tax Paid: $10,000 (Paid via instalments throughout the year)
Terminal Tax Due: $6,277

Methods to Calculate Provisional Tax

In New Zealand, you need to pay provisional tax if your residual income tax (RIT) is more than $5,000.

Standard Method: Provisional tax is based on the Residual Income Tax from the last filed tax return, plus 5%.

Estimation Method: If circumstances change, you can estimate your tax for the current year and pay that amount. Be cautious, as underestimating can result in interest and penalties.

Ratio Method: This method allows GST-registered taxpayers to calculate provisional tax based on their sales figures in each GST return. It aligns tax payments with business performance and can be particularly good for seasonable businesses.

Accounting Income Method (AIM): Provisional tax is based on the profit reported in regular management accounts, submitted through IRD-certified accounting software.

Key Considerations

Understanding and managing your business tax is crucial for financial health. Use tools like a business tax calculator NZ to estimate your tax obligations and ensure timely payments.

Navigating business income tax can be complex, but with the right knowledge and tools, you can manage it effectively. For personalised advice and to ensure compliance, consider consulting with a professional. That’s where we come in!

Contact Us Today!

For more detailed information or assistance with your business or individual tax returns in NZ, don’t hesitate to reach out. We’re here to help you understand tax and guide you through the process of minimising your tax obligations while ensuring you remain compliant.

Let us simplify your tax and help you stay accurate and efficient. We offer a comprehensive range of accounting & tax services as well as personalised business budgeting services and advice.

Contact the team at Drumm Nevatt & Associates today and let’s get you on the right track!