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How to Include Tax in Your Budgets

Updated: Mar 11

We had a farming client ask us what figure they should include for tax in their budget. They are considering their first contract milking position and want to make sure that they will have enough cash to get through the season, and that its worth the risk (versus remaining as a farm manager). Below summarizes what we went over with them.


Profit = Income – Expenses

  • The first key point is that tax is calculated based on your profit, which is income minus expenses.

  • Expenses include anything that relates to running the business, and some expenses may need to be adjusted for a private portion as they are used for both business and personal purposes.

  • If you aren’t sure what expenses, you can claim please consult us or the DairyNZ website.

Example:

  • Milk production of 100,000 kg MS at $1.50/kg MS contract rate = $150,000 income

  • Expenses of $50,000

  • Taxable profit = $100,000 (this is the figure you pay tax on)


Tax rates

  • The tax system is quite complicated because there are different tax rates depending on what type of entity you are.

  • Individuals have a tiered tax bracket system, where the first $14,000 is taxed at 10.5%, the next $34,000 is taxed at 17.5%, the next $22,000 is taxed at 30%, income earned between $70,000 - $180,000 is taxed at 33% and income earned over $180,000 is taxed at 39%.

  • Key point – If you earn $75,000 you are not taxed on all of it at 33% but are taxed in brackets as outlined above.

  • Companies are 28%.

Example 1 – Sole Trader

  • Sole traders are those that run the business under their personal name. They are taxed at the individuals tax rates.

  • If taxable profit is $100,000 then the tax equates to $23,920

  • We find it useful using a tax calculator such as https://www.paye.net.nz/calculator/

Example 2 - Company

  • The business is being operated by a company and you as the shareholder work for the company.

  • You will be remunerated by a PAYE wage (not always the best option) or a shareholder salary. A shareholder salary is a book entry done by the accountant at the end of the year. Throughout the year you would take drawings from the company account to cover personal expenses.

  • Companies require more strategies to minimize tax, which is where a good accountant comes in.

  • Scenario 1: If taxable profit is $100,000 then it could be taxed fully in the company at 28% which equates to $28,000 of tax.

  • Scenario 2: If taxable profit is $100,000 but we pay a shareholder salary of $48,000 to you, that leaves $52,000 of profit in the company. The company tax will be $14,560 and the tax for you personally would be $7,420. Total tax paid would be $21,980.

  • If we compare scenario 1 where you pay $28,000 of tax versus scenario 2 where you pay $21,980 of tax – which one would you prefer? We know which one we do.

  • The difference arises because under scenario 2 it allows you to utilize the lower tax rates of the individual at 10.5% and 17.5% rather than 28% for the company.

  • This is where a good accountant earns their keep and shows how complex it can be when budgeting on your tax. If in doubt, always consult an accountant.

Standard rates to use for budgets


If you want a quick estimate of tax for budgeting purposes we suggest using the below rates to apply as a flat rate:


o Profit $100,000 – 23%

o Profit $150,000 – $250,000 – 25%

o Profit $300,000+ – 26%


This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.



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