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Im a Contractor How do I manage GST and WHT

I'm a Contractor: How do I manage GST and WHT?

If you're a contractor or freelancer, there are a few things you should know about GST and withholding tax (WHT).

Woman standing with laptop, pink trees in background

If you expect to earn $60,000 a year you need to register for GST

That is, if you are invoicing $5,000+ a month, on a regular basis, then you should register through MyIR. If you are GST registered, then you add 15% GST to your service fees, and pay the GST you collect to IRD. You can also claim back the GST you have paid on your business purchases and expenses.

You can lodge GST returns on a 6 monthly, 2 monthly or 1 monthly frequency. You can choose invoice, payments or hybrid basis, which determines if you disclose GST when invoiced or when paid. Most of our freelancers choose to file GST returns 6 monthly on a payments basis, so they don't have to prepare their GST return very often, and they can refer to their bank statements for adding up income and expenses.

What is withholding tax (WHT) and can I choose my own rate?

Contractor income is called schedular payments by IRD, and withholding tax (WHT) is a type of income tax that is deducted from schedular payments and paid directly to IRD by the customer paying the invoice.

The usual rate of WHT is 20% and that is typically a good rate for someone earning up to $100,000 a year after deducting expenses, because it means you have less than $5,000 to pay in terminal tax and you won't have to pay provisional tax. If you earn more than $100,000 a year, then you can opt for a higher WHT rate. If you earn less than $50,000 a year, you may want to select a lower rate of WHT.

If you would rather not have WHT deducted, you can apply to IRD for a certificate of exemption (COE) which you have to show to the customers paying your invoices. This may be because you have lots of expenses that you can claim back, or it may be that you prefer to manage your tax payments yourself, or it may be that the payer doesn't want to register as an employer for a one-off payment. If you are a NZ resident contractor paid by a labour hire customer under a labour hire agreement, then you have to apply for tailored tax rate of 0% instead of a COE. In both of these cases, you have to pay provisional tax directly to IRD instead.

What do I show on my Customer Invoice?

When GST & WHT registered, a typical contractor invoice will look like this:

Tax Invoice

Contractor name, GST number

Invoice date
Name and address of recipient

Services description

$1,000.00

Less WHT (20% of the $1k)

(200.00)

Plus GST (15% of the $1k)

$150.00

Total Invoice

$950.00

Payment terms and bank account details

 In the example above, the customer pays $950 to the contractor and $200 to the IRD. The contractor completes a GST return at the end of the filing period, and pays $150 to IRD.

 At the end of the income tax year, usually 31 March, the $1,000 income is included in the contractor's income tax return, and the $200 WHT is treated as a credit (reduction) against the income tax payable.

 Working out your taxes can be the most challenging part of being a contractor. Team up with a chartered accountant to help you navigate the complexities, so you can get on with what you do best.

-          Serena Irving

Download a PDF version here or contact the author by email. Like our Facebook page for regular tips.

Serena Irving is a director in JDW Chartered Accountants Limited, Ellerslie, Auckland. JDW is a professional team of qualified accountants, auditors, business consultants, tax advisors, trust and business valuation specialists.

A well-written article like this, which is general in nature, is no substitute for specific tax advice. If you want more information about the issues in this article, please contact the author.

If you're looking for other useful information for freelancers, like what expenses you can claim, refer to our previous article: https://www.jdw.co.nz/newsletters/blog/jdw/setting-up-as-a-freelancer

 

Taxing Content Creation

Taxing Content Creation

My husband watches videos of gamers playing his favourite first-person shooter computer game. My children watch other children unboxing toys and hamsters finding their way through mazes on YouTube Kids. I follow my favourite style consultant on Instagram and read her blogs. My younger cousins avidly watch the latest TikTok videos. We love watching these people having fun, so can they really be earning taxable income?

Inland Revenue is trying to clarify the tax rules for content creators, like bloggers, influencers, gamers, online reviewers, video makers and has issued an Exposure Draft with a deadline for comment by 1 June 2021. We have outlined below some examples, to outline some of the difficulties of the proposed rules, as it means that content creators may be liable for more income tax than they previously thought. If you are affected by these proposed rules, do you agree with them?

Woman typing on laptop

Is it a Hobby, a Side Hustle or a Business?

This distinction can change over time. There is a low-income exemption for ages 18 and under, so they don't pay tax if they earn less than $2,340 a year. For over 18s, the exemption is only $200 a year.

For instance, an amateur photographer sets up a Facebook page posting images of his LEGO Creator models. A toy store offers to pay him $150 for a one of his photos, to use in their LEGO in-store display. At this stage, the photography is still a hobby, the income is not regular, expenses far outweigh the income, and he is not intending to do photography as a business. He earns less than $200 so he doesn't need to declare any taxable income.

His photography and LEGO creations improve and he sets up Patreon account. Donors get access to exclusive photos which are not on his free Facebook page. He receives lots of small donations during the year, pushing his income up to $250 in a year. The $250 is related to his photography activities and more than $200, so he needs to declare it as taxable income. He can deduct his expenses though, such as new lenses, editing software, internet subscriptions.

He creates a stop motion video from his LEGO which goes viral on Tiktok. He receives commission income from toy stores for the post links, which is taxable income, even though this is still a side hustle for him.

He stops creating photo posts and video posts as he's too busy with his main work, but still is receiving income from his old photo / video content. Even though it's now passive income, it is still taxable, but he can't keep claiming business expenses because he is not actively involved.

Are Gifts of Goods and Contras Taxable?

IRD considers goods and contras to be taxable if they relate to the income-earning activity of the content creator, and can be converted into money. But if you didn't buy it, how would you decide on the taxable value?

For instance, in the LEGO photographer example, if a toy store decided to gift a LEGO set to photographer as well as paying commission, the secondhand value of the LEGO set would be used to determine a reasonable estimate of the taxable value. You could look at what similar sets are selling for in TradeMe or another online marketplace, and deduct the listing fee or commission for the sale.

If a homewares reviewer received a free espresso machine in exchange for a review, that is considered a contra. The espresso machine could be sold second-hand afterwards or kept, but the timing of the income would be receipt of the espresso machine. The value would be either what it was actually sold for, or estimated from looking at an online auction website.

In some cases there may be no resale value, such as used personal items like toothbrushes. If a gamer was required to show and consume some branded ice coffee drinks while gaming as part of a sponsorship deal, then the drinks would not be income as they cannot be sold.

What Expenses to Claim?

If you have an income-earning activity you can claim a deduction for expenses and depreciation (gradual write-down of assets) on items you use in the business. There needs to be a relationship between the expense and the income-earning activity.

A blogger may have home office costs, internet and phone, depreciation on computer, subscriptions to industry relevant material, professional fees. If the blogger has to travel to interview people or do research, then the travel costs can be claimed.

Most clothing expenses makeup and haircuts are not deductible, even though the content creator is the face of their brand and has to be well-presented. Clothing is considered private or domestic expenditure because it is used for warmth and modesty. This applies even if the clothes are worn just for a photoshoot. An exceptional circumstance may be made for a costume used in a skit. I read recently that ABBA had outrageous costumes to get around similar rules in 1970s Sweden[i]. Models can usually claim hairstyling and makeup just before a photoshoot. It appears that IRD are not willing to extend a claim for clothing, hair and makeup to influencers who model for their own social media posts and act in their own videos.

 

Content creators, are a relatively new form of advertisers, and IRD is seeking to provide guidance to them to ensure they know their tax obligations. In doing so, some hobbyists may quickly find themselves with taxable income sooner than they thought, and some influencers may have fewer expenses to claim. The lines between influencer, model, celebrity and actor may be blurry at best, and it may require serious debate to clarify them.

-          Serena Irving

Download a PDF version here or contact the author by email. Like our Facebook page for regular tips.

Serena Irving is a director in JDW Chartered Accountants Limited, Ellerslie, Auckland. JDW is a professional team of qualified accountants, auditors, business consultants, tax advisors, trust and business valuation specialists.



[i] https://www.theguardian.com/music/2014/feb/16/abba-outfits-tax-deduction-bjorn-ulvaeus

Setting up as a Freelancer

Setting Up as a Freelancer

 You are a highly skilled professional, providing services to other businesses such as graphic design, marketing or IT consulting.  You are now a contractor or freelancer, a self-employed business owner. It doesn't matter if you employ just yourself or a large team, have few resources or huge capital, have lots of clients or just starting out, you are still a business owner.

Here are my brief answers to the most common business questions I have been asked by new freelancers. Each paragraph is a topic in its own right, so do ask us for more information. If you want more confidence on your business journey, start here.

Pink Rosebud

Should I Form a Company?

When deciding whether you should operate as a company, partnership or sole trader, consider these factors: ownership, commercial risk, credibility, administration, income allocation.  A Look Through Company is a hybrid company-partnership structure, with the legal status of a company, but treated as a partnership by Inland Revenue for income allocation and tax.

Ownership

How many working owners? Will there be non-working investors? If it's just you, then sole-trader would be simpler. If there's outside investment or unequal personal effort between owners, then a company would be advisable. Partnerships are simpler structures than companies, but if a partner leaves or joins, you have to register a new partnership.

Commercial Risk

Sole traders and partners in a partnership take on the risk for business losses. Companies are separate legal entities, so shareholders are not personally responsible for company debts unless they have provided personal guarantees. Directors may still be liable if they have been careless, negligent or trading recklessly.

Credibility

Some suppliers and customers prefer to deal with a company.

Administration

Companies must be registered at the Companies Office, and file an annual return confirming addresses and other company information in the same month each year. Registered companies are issued a company number and New Zealand Business Number. Companies also have stricter reporting requirements, so company accounting fees are generally higher. Companies need an IRD number, which is different from the IRD number of the shareholders.

Partnerships and sole traders need just an IRD number, but it's a good idea to get a New Zealand Business Number (NZBN) to store your contact details. Sole traders use the same IRD number for all their personal income. Partnerships can have their own IRD number. The Government is working towards using the NZBN for e-invoicing, which will make it easier for businesses to send out invoices and get paid.

Income Allocation

For a sole trader, the business profits (losses) belong to the individual. For a partnership, business profits (losses) are allocated evenly between partners, unless you have a partnership agreement which specifies a different allocation. For a company, the business profits (losses) after deducting shareholder salaries remain in the company unless it is a Look Through Company (LTC) or personal services attribution applies.
For a sole trader, the business profits (losses) belong to the individual. For a partnership, business profits (losses) are allocated evenly between partners, unless you have a partnership agreement which specifies a different allocation. For a company, the business profits (losses) after deducting shareholder salaries remain in the company unless it is a Look Through Company (LTC) or personal services attribution applies.

What Records Do I Need to Keep?

Your business needs its own bank account. It is easier to track income & expenses that way. If you need to use money for private expenses, then transfer the funds to your personal account (this is called Drawings).

You'll need to keep copies of invoices (customer & supplier), till receipts and other accounting records for over 7 years. Many accounting apps allow you to scan or photograph invoices or till receipts so that you don't have to retain the paper copy. Keep your GST workings attached to copies of the GST returns you lodged.

There are a lot of accounting apps available for freelancers, to send out invoices and track your business transactions. Our favourites for freelancers include invoicing and bank reconciliation: Xero Starter, MYOB Essentials, Wave, Reckon One.

Don't just look at cost, look at ease of use and what you want to do with it. Choosing a suitable accounting app depends on how many invoices, bank transactions a month; whether you employ staff, sell goods, manage projects with milestones; whether you charge GST. 

Keep copies of important contractual agreements, like service performance agreements. You'll need these if you have a dispute with a client. If you form a company you will also need to keep a register of shareholders and directors.

Every year you will need to lodge a tax return with IRD. Sole traders will lodge an IR3 individual return. Partnerships and LTCs will lodge an IR7 return, and the partners/LTC owners will lodge an IR3. Companies will lodge an IR4 return, and shareholder-employees will lodge an IR3.

Do I need to register for GST?

If you are GST registered, then you add 15% GST to your service fees, and pay the GST you collect to IRD. You can also claim back the GST you have paid on your business purchases and expenses.

If you expect your business to earn income (before deducting expenses) of $60,000 or more, then the business must register for GST. If you expect it to earn less than $60,000 then you can voluntarily register for GST. Voluntary GST registration may be helpful if you are buying a vehicle or expensive equipment for the business, because you can claim back the GST. It may also be helpful to register early if you are near the $60,000 threshold, so you don't have to adjust your fees.

If you are freelancing for clients based offshore, you may be able to zero-rate the fees (charge 0% GST) , as you are exporting your services. Check with us if you think this applies to you.

You can lodge GST returns on a 6 monthly, 2 monthly or 1 monthly frequency. You can choose invoice, payments or hybrid basis, which determines if you disclose GST when invoiced or when paid. Most of our freelancers choose to file GST returns 6 monthly on a payments basis.

What Expenses can I Claim?

You can claim a variety of expenses for GST and income tax. This is not an exhaustive list and there are some limitations, so it pays to check with your tax advisor. Some suppliers may not be GST registered, so you can only claim those expenses for income tax and not GST.

  • ACC levies, professional indemnity insurance, other insurances. Life insurance and some disability insurance premiums are not claimable for GST and income tax.
  • Accounting, legal, business coach and other professional fees.
  • Bank fees and interest on business borrowing (no GST).
  • Courses for professional development.
  • Depreciation - gradual write down of equipment or vehicle cost. (No GST on depreciation, but you may claim GST on equipment and vehicles used for business.)
  • Entertainment - coffees with clients and prospects (50% claimable) or meals while travelling.
  • Home Office – Proportion of house costs related to your office, studio, workshop and storage space. Rent (no GST), interest (no GST), water, rates, power, gas, repairs.
  • Marketing – paid advertising, branding.Mobile phone, business landline, internet.
  • Motor vehicle expenses - Either keep a logbook and claim some mileage for income tax (no GST). Or claim the business portion of expenses for income tax and GST.
  • Rent, parking, travel.
  • Software licences.
  • Stationery and printing.
  • Subscriptions e.g. professional associations, networking groups.

What are Schedular Payments?

Schedular payments are made to contractors, usually individuals, for certain activity types. The payers deduct tax at a set rate, usually 20%. You can apply to IRD in MyIR for a tailored rate (10% or more) or a certificate of exemption to manage the taxes you pay more closely. The tax deductions are passed by the payer to IRD on your behalf, and offset against the income tax you have to pay for that year.

What is Provisional Tax?

Provisional tax is a regular payment of income tax to spread the amounts across the year that the income is earned. Most taxpayer have a March year end (balance date) and pay provisional tax three times a year: 28 August, 15 January and 7 May (after balance date). If you are GST registered on a 6 monthly basis, then provisional tax is due on the same dates as GST: 28 October and 7 May (after balance date).

Terminal tax is the final instalment of income tax and reduces by the amount of provisional tax you have paid. Terminal tax for 31 March 2020 balance date is due on 7 February 2021 or 7 April 2021 if you have a tax agent.

Setting up as a freelancer/contractor/self-employed business owner can be easy, once you know the answers to these initial business questions. Please contact us if you need any help.

 Rose pair

This information in this article is for general information purposes and should not be relied on without additional advice specific to your circumstances. If you require advice in relation to your specific circumstances please contact the author for a consultation.

Download a PDF version here or contact the author by email. Like our Facebook page for regular tips.

- By Serena Irving, JDW Chartered Accountants

Serena Irving is a director in JDW Chartered Accountants Limited, Ellerslie, Auckland. JDW is a professional team of qualified accountants, auditors, business consultants, tax advisors, trust and business valuation specialists.

 


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