What The Tax? #1: Income Tax
Income Tax, Provisional Tax, Terminal Tax, Goods and Services Tax… It’s easy to get lost and confused with all the names. In this article, we will have a closer look at the Income Tax.
What is the income tax?
Income Tax is the tax that you pay on the income you earned.
Let’s look at an example. Anna is a web designer and she works for herself. In her first year in business, her revenue is $60K – that’s the income she made from providing web design services to her clients. $60K is her revenue.
Anna made revenue of $60K in her first year in business
Anna also has business expenses, for example, she works from home and claims a portion of her rent and electricity bills. Anna also bought a computer for her business and she needs business-specific software. All her business expenses for the year add up to $10K.
Income tax is payable on the taxable income – in this case, profit before tax. Profit before tax is the amount left after all the business expenses are deducted. Anna’s profit for the year is $50K. It is revenue ($60K) less business expenses ($10K). Anna will need to pay income tax on $50K.
Anna’s business expenses are $10K. It leaves her with taxable income of $50K.
New Zealand uses progressive tax rate system. It means that for the first $14K that you earn you will pay 10.5% in income tax. Then, for every dollar that falls in the $14,001- $48K range, your income tax will be 17.5%. For every dollar that falls in the $48,001-$70K range, your income tax will be 30% and everything over $70K is taxed at a rate of 33%.
New Zealand operates a progressive tax system. The amount of tax you pay is dependent on the amount of income that you earn during the financial year.
For Anna, this means that out of all her taxable income ($50K) her first $14K will be taxed at 10.5%. $14K x 10.5% = $1,470.
The first $14K of Anna’s income is taxed at 10.5%.
Then, her taxable income that falls within the $14,001-$48K range, will be taxed at 17.5%. ($48,000 – $14,000) x 17.5% = $5,950. It makes up another $5,950 in tax.
Anna’s income between $14,001 and $48K is taxed at 17.5%.
Lastly, Anna’s taxable income that falls within the $48,001-$70K range, will be taxed at 30%. Anna only had $50K of taxable income and every dollar above $48K up to $50K will be taxed at 30%. ($50,000 – $48,000) x 30% = $600.
Anna’s income between $48,001 and $70K is taxed at 30%.
It all adds up to $8,020 = $1,470 + $5,950 + $600. Anna’s year-end-tax is $8,020.
When do I have to pay the income tax?
When your income tax payment is due depends on whether you have a tax agent with a valid extension of time. If you don’t have one, your end-of-year income tax is due on 7 February 2018 for 2017 end-of-year income tax and 7 February 2019 for 2018 end-of-year income tax. If you have a tax agent with a valid extension of time, the due date is 7 April 2018 for 2017 end-of-year income tax and 7 April 2019 for 2018 end-of-year income tax.
Remember that there are also other types of taxes (we will cover them in our next articles) so make sure you don’t miss the deadlines.
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The information provided here is of a general nature. It is not intended to be a substitute for professional advice.