When Andree Sabourin started a part-time business selling nutritional supplements, the aim was to slash her hefty tax bill. By day she was a managing director of a wholesale travel business and the Inland Revenue was taking a sizable chunk of tax from her pay packets.
So Sabourin became a
Usana Health Sciences business owner. "I started it for tax reasons," says Sabourin. "I had read Wealth Creation, What Your Accountant Doesn't Tell You by Fiona Clayton-Law, which explained there were ways to reduce the tax you were paying."
In her first three years, Sabourin received tax refunds of around $4,000 a year - thanks to her part-time business. Today five-and-a-half years down the track the income from her Usana business has grown enormously and she believes she saves tens of thousands of dollars each year in tax in comparison with what she would pay if all of her income came from employment.
For people in full-time work there are remarkably few tax breaks. It can be galling to see your self-employed friends claiming back tax on everything from their home power bill to the cost of servicing their cars - and in some instances overseas travel.
But if you're clued up and have a good accountant even people on relatively low incomes can save a thousand or two in tax every year - says Peter Sibbald, author of Pay Zero Taxes.
Starting a part-time business as Sabourin did is one of the most effective ways to slash your taxes - says Sibbald - along with owning rental property.
In the case of part-time businesses, he says, you can in most instances claim back the same home-office and car expenses as full-time business owners. For example you can claim a portion of the expenses of running their home equivalent to the size of your home office. If, for example, the floor space of the office makes up 10% of the home, then 10% of the electricity bill, mortgage, rates and so on can be deducted against your business income. Items that are used solely in the office can be claimed in total. The trick is that you probably would have bought them anyway - such as a telephone, computer and so on. Just now they're tax deductible.
Even if you don't use your car for your business, you can depreciate it over time and also claim a flat 25 per cent of fuel and running costs. And if you choose to become GST registered you'll be able to claim back the GST on items ranging from telephone calls to the quantities of tea and coffee you buy.
Sibbald says someone earning around $100,000 in employment with a home office and "all the add ons" would save around $10,000 a year in tax. But even low income earners can save a thousand or two. Enough to pay for an overseas holiday.
For part time business owners it may also be possible in certain circumstances to claim back the cost of travel and accommodation to overseas or out of town conferences. Then you simply might tack a holiday onto the end of the trip.
You only need work a few hours a week on your business. Although it should be said The Inland Revenue Department doesn't allow home office and other deductions on what it views as "hobby businesses". These are business that you have set up for your enjoyment and pleasure, such as model train collecting, - not with an ultimate profit motive.
Heather Douglas managing director of internet portal Homebizbuzz.co.nz says network marketing businesses such as Usana, Neways and Amway are becoming increasingly popular as part-time businesses and bring tax advantages for otherwise employed people because they are usually run from home offices.
In the case of couples - where one is a high earner and the other may not be working, it makes sense to run a small home-based business, says Douglas. If that business is set up as a loss attributing qualifying company (LAQC) with the high earning partner as the major shareholder - then any losses can be offset against his or her tax.
As well as having a part-time business, investing in property can be very tax efficient - although now may not be the best time in the property cycle to become a landlord for the first time.
The theory goes that you buy a property with the intention of making a long-term capital gain on it, which isn't taxable, says property accountant Michael McCook of AccountabilityNet. You then claim any short term losses (because the rent is unlikely to cover the mortgage and expenses in today's property market) against your day-to-day income.
Almost anyone who has a rental property should have it set up as an LAQC, says McCook. Even if the property is turning a profit, it's possible to withdraw capital from the rental property and use this to pay off your own home mortgage. Interest payments on your rental property mortgage are tax deductible, whereas on your own home they're not. As with small businesses, if you're a couple the shareholding of LAQCs should be set up to ensure that the partner paying the highest rate of income tax is able to claim back the majority of the tax loss.
Of course setting up a business to make a loss isn't necessarily an intelligent idea in the long run for wealth creation. Your part-time business might even replace your day job in the end as it has with Christchurch-based accountant Tony Blackie, who ran a property management business Property Management & Investment on the side while working as a full-time employee. He only works one day a week in paid employment now for what he calls "office therapy".
In addition to claiming any rental losses against your taxes, it's also common for landlords to claim depreciation on the "improvements" - which means on the house and also chattels such as curtains and carpets. The Inland Revenue has cracked down on rental property depreciation - because some landlords were claiming items such as partition walls as chattels. Even so the 3 per cent allowable on improvements and 22 per cent on curtains and 33 per cent on carpets can add up to thousands of dollars each year.
Running part-time businesses and rental properties may not suit all. Even so, there are ways to save tax on your employed income, says Sibbald.
One of the simplest is to convince your employer to allow you to work as a sub-contractor rather than an employee, says Sibbald - something he did while working for Ernst & Young. You can then claim expenses such as travelling to a site of work as a self-employed person, cost of materials, professional registration and so on.
Even if you can't get your employer to agree to you becoming self-employed, you may be able to get him or her to pay for otherwise personal items such as professional subscriptions and training courses and claim back the tax and GST on them.
One of the few deductions that employees and their self-employed cousins can claim - is income protection insurance, says Sibbald - something he believes everyone should have.
If you really want to save tax, then employing a smart accountant makes sense. Most accountants say they save you more than you pay them in fees. What's more, those fees are tax deductible.
Pay less tax
* Claim home office expenses on out-of-hours businesses
* Register for GST and claim it
* Offset business losses against fulltime income
* Claim accountant's fees for preparing your tax return
* Run rental property at a loss on paper
* Become a sub-contractor instead of full time employee
* Get employers to pay personal expenses
Earn yourself a tax break
When Andree Sabourin started a part-time business selling nutritional supplements, the aim was to slash her hefty tax bill. By day she was a managing director of a wholesale travel business and the Inland Revenue was taking a sizable chunk of tax from her pay packets.
So Sabourin became a
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