this post was submitted on 17 Nov 2023
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Heh. It's not the spreadsheet, it's stuff like tax. I am trying to teach myself how to do IR4s but it's still confusing.
The bookwork or the IR4 itself? It's been a long time but I can try to answer questions, others can probably help too.
Thanks! It's the IR4. I actually had an appointment with the IRD and they helped a lot but they told me to ask an accountant about one thing and that's not really an option because it would cost more than the entire income.
It was basically about how if you have capex to improve an asset do you add it to the asset's book value?
I don't really understand drawings and shareholder salary either, but since either would be at $0 this year, I can always cross that bridge when I hopefully one day come to it.😃
I think people at the IRD are finding me a bit strange for having a "business" that makes less than most people's biscuits budget but it's like decaf - better for the soul than having nothing.
I believe it works like this: if you spent less than $1,000, you expense the full amount that year. If you spent more that $1,000, you add this to the book value that you are depreciating from each year. If you don't understand what I mean then happy to explain more.
I'm not an expert. I believe I can explain these at a conceptual level, but not sure how well. Drawings are money coming out of the company, kind of like you took a loan from the company. The shareholder salary is allocating that money as a salary (to a shareholder rather than an employee). So like saying this isn't a loan but a salary on which income tax should be paid. It gets a bit more complicated, because you might have already put money into the company to get it started, and you can withdraw that tax free (since it's not salary but withdrawing money you put in). So your drawings might be against that balance rather than profits.
Probably it's that you have a registered company. Many people have small amounts that they do as a sole trader, without the upkeep of a registered company. Plus, if your income is under $200 and you don't have any other reason to do an IR3 (individual tax return), then you don't have to declare it.
There are liability benefits to a company if you need to protect other assets, and there's the professionalism aspect, but it's probably more common for people running a business with a low turnover to be sole traders rather than registered companies.
Omg thank you so much!!!! This makes perfect sense. It's way less than $1,000 so I will just chuck it into expenses and it won't mess up my depreciation. Honestly, thank you!!!!!!
I still don't fully understand drawings vs salary but I think I get it.
I really, really didn't want a company - it's so confusing and expensive and you can't use Hnry like sole traders can, plus I know it's weird - but my dream is to one day support myself, and because of a few quirks of Work and Income, mathematically speaking, it's the only sustainable structure.
On SLP if we can earn from investments or work we get deductions. For gross income between $160 - $250 they deduct 30% from your after-tax benefit, and of course you also pay tax on the income on top of that (17.5% for me).
Which would be okay but you are not allowed to deduct your expenses from your income (they base it on proof of gross).
Anything over $250 is where it gets brutal because the deduction is 70%, so after tax (and before expenses) you only keep 12.5%.
So if I earn $250, I effectively earn 131.25 before expenses, and if I earned, say, $50 on top of that I would only get to keep $6.25 of it before expenses. And the trouble is I do have expenses.
The kicker though, is one client will only pay me if I'm GST registered, and WINZ absolutely counts GST as "income" (this really annoyed IRD staff who told me WINZ staff are breaking the law on that, but there's nothing I can do about it).
So that means the first tranche is effectively reduced by 62.5% and the second by 102.5% (70%+17.5%+15%) meaning for that $50 not only do I lose the whole thing, I would also be short $1.25 when it came to paying tax, and short my expenses on top of that. So the $250 mark (keeping $131.25 before expenses) would be the absolute pinnacle I could achieve, and anything after that would literally be going backwards.
But with a company, I can pay myself after I break even, so I can be like a normal person and don't have to be negatively affected by the expenses and the GST. I will still hit a ceiling of course but it will be a bit fairer and less bizarre.
Glad I could help!
It's a book keeping thing. I just searched this up, which might help, but not sure it explains the initial investment part.
WINZ is so messed up man. I feel like this is well known, yet the last government didn't try to fix it and the new one almost certainly won't.
Feel free to ask for help in the future if you need it. And also know that as long as you are doing your best you are very unlikely to get in trouble with the IRD, even if you just guessed at what was right. This is of course different if you're making loads of money and never bothered to ask an accountant you could obviously afford, but while you're income is low they are happy with you just trying your best.
Thanks, I appreciate it so much. Am now halfway through!
That bookkeeping link was great thanks, and led me on to this one. I think I get the picture... sort of!
Thanks for reassurance about IRD too. They have actually been really helpful. They also told me to keep records of all my reasoning so I can explain it later if they ever have to revisit it, so I'm keeping a document for each return.
Hey, thanks again!!!