Soon, we'll be at the end of another financial year. There's a few myths I'm hearing that seem to crop up every year.
Here are a few things small business owners should relegate to the realm of April Fool's Day.
Myth 1: Buying a car will reduce my tax bill. Sounds good, right? But buying that new shiny vehicle is not the answer to reducing your tax bill.
You will only get one month of depreciation on the vehicle and perhaps not even a lease payment deduction if the first payment is due in April. What this purchase may do is commit you to servicing a debt you don't actually need. If you notice that your vehicle running and maintenance expenses are high, investigate your options for cost savings — but if you don't really need it then think twice about this purchase.
Myth 2: If I buy items or assets that are $500 or under, then they can automatically be written off. This is a popular one for businesses replacing gear at year-end.
Low value assets of $500 or under can be written off immediately against your tax. But take care, if there are a number of assets acquired at the same time from the same supplier with the same deprecation rate and the total is more than $500 then it's an asset and will be depreciated. Lots of shopping at the same place won't pay off.
Myth 3: I pay tax on drawings so if I don't draw too much this month, I will have a smaller tax bill.
This is one that I hear most often and can be really confusing to get your head around.
The truth is that tax is paid on your business profit, not the amount that ends up in your personal bank account. Drawings represent how much you have taken while profit represents how much of your business income is left after business expenses are taken out.
Myth 4: I only need to keep tax invoices for my business over the amount of $50, the rest I can throw away.
This is true for GST, you don't need to hold tax invoices items less than $50, but for income tax you need to have invoices for all expenses, whatever the amount. You also need to keep records for seven years or as long as the IRD requests you to do so.
Jeremy Tauri is an associate at Plus Chartered Accountants.