Common Tax Deductions and Credits for Individuals and Businesses
Navigating the complexities of taxes can be daunting for both individuals and businesses in New Zealand. However, understanding common tax deductions and credits can significantly reduce your tax liability and ensure compliance with the Inland Revenue Department (IRD). This article explores some of the most common tax deductions and credits available in New Zealand and provides guidance on how to make the most of them.
Common Tax Deductions for Individuals
Work-Related Expenses
Individuals can claim deductions for expenses directly related to earning their income. These can include:
- Home Office Expenses: If you work from home, you can claim a portion of your household expenses, such as rent, electricity, and internet. The IRD provides a simplified method for calculating home office expenses based on the area of your home used for work.
- Vehicle Expenses: If you use your personal vehicle for work purposes, you can claim deductions for running costs. You can use either the kilometre rate method or the actual cost method to calculate these expenses.
- Work-Related Training: Costs associated with training courses that directly relate to your current job can be deductible.
Donations
Donations to approved charities and organisations can be claimed as a tax credit. The IRD allows you to claim 33.33% of the total donations made, up to the amount of your taxable income. Ensure you keep receipts and records of all donations.
Medical Expenses
While New Zealand does not allow deductions for general medical expenses, you can claim a tax credit for donations to medical research organisations. Additionally, if you have a disability, certain expenses related to your condition may be deductible.
KiwiSaver Contributions
Contributions to KiwiSaver, New Zealand’s retirement savings scheme, can provide tax benefits. While employee contributions are made from pre-tax income, the government also provides a member tax credit of up to $521.43 annually, provided you contribute at least $1,042.86 within the year.
Common Tax Deductions for Businesses
Operating Expenses
Businesses can claim deductions for a wide range of operating expenses, including:
- Rent and Utilities: Costs for renting business premises and utilities such as electricity, water, and internet are deductible.
- Salaries and Wages: Payments to employees, including wages, salaries, and bonuses, are deductible.
- Office Supplies: Expenses for office supplies and equipment necessary for running the business can be claimed.
- Advertising and Marketing: Costs associated with advertising and marketing, including digital marketing, print ads, and promotional materials, are deductible.
Depreciation
Businesses can claim depreciation on assets used for business purposes. Depreciation allows you to spread the cost of an asset over its useful life. The IRD provides specific rates for different types of assets, and it’s essential to use the correct rate to avoid issues during tax assessments.
Bad Debts
If your business has made efforts to recover a debt but has been unsuccessful, you can claim a deduction for bad debts. Ensure you have documentation showing the efforts made to recover the debt and that it has been written off in your accounts.
Research and Development (R&D) Tax Incentive
The New Zealand government offers an R&D tax incentive to encourage innovation. Businesses conducting eligible R&D activities can claim a tax credit of 15% on qualifying expenditure. To be eligible, the R&D activities must aim to create new knowledge or improved processes, services, or goods.
Motor Vehicle Expenses
If your business uses motor vehicles, you can claim deductions for vehicle expenses. Similar to individuals, businesses can use the kilometre rate method or the actual cost method to calculate deductions.
Common Tax Credits
Independent Earner Tax Credit (IETC)
The IETC is available to individuals earning between $24,000 and $48,000 annually and who are not receiving other forms of income support. The maximum credit is $520 per year. To claim the IETC, ensure you complete the relevant section in your tax return.
Working for Families Tax Credits
These credits are designed to support low to middle-income families with dependent children. The credits include the Family Tax Credit, In-Work Tax Credit, Minimum Family Tax Credit, and Best Start Tax Credit. Eligibility and the amount you can claim depend on your income, the number of children, and their ages.
Tax Credits for Donations
As mentioned earlier, individuals can claim a tax credit for donations to approved charities and organisations. This credit is 33.33% of the total donations made, up to the amount of your taxable income.
Tips for Maximising Deductions and Credits
Keep Detailed Records
Maintaining accurate and detailed records is crucial for claiming deductions and credits. Keep receipts, invoices, and any other documentation that supports your claims. This will make it easier to complete your tax return and provide evidence if required by the IRD.
Use Accounting Software
Consider using accounting software to track your expenses and income. Many software options can automate calculations and generate reports, making it easier to identify deductible expenses and ensure compliance.
Consult a Tax Professional
Tax laws can be complex and subject to change. Consulting a tax professional or accountant can help you navigate these complexities, ensure you are claiming all eligible deductions and credits, and avoid costly mistakes.
Stay Informed
Keep up-to-date with changes in tax laws and regulations. The IRD website is a valuable resource for the latest information on tax deductions, credits, and compliance requirements.
Understanding and utilising common tax deductions and credits can significantly reduce your tax liability and improve your financial health. Whether you are an individual or a business owner in New Zealand, taking the time to learn about these opportunities and implementing best practices for record-keeping and compliance can make a substantial difference.
By staying informed, keeping detailed records, and seeking professional advice when needed, you can navigate the complexities of the tax system and maximise your potential savings. Remember, the IRD and various professional bodies in New Zealand offer resources and support to help you make the most of your tax situation.