What are the different types of tax?

You pay tax depending on how you earn income.

The four main tax types are Provisional, Terminal, Withholding (IRD calls it Scheduler, just to confuse everyone!) and PAYE. Provisional Tax and Terminal Tax both fall under the category of Income Tax. You'll pay your income tax either as Provisional Tax or as Terminal Tax.

Provisional Tax

In the next year of trading, we need to work out what income the business and the shareholders are likely to make, as you will be required to pay either two or three instalments of Provisional Tax and a final instalment of Terminal Tax. If your GST is six monthly you pay in two instalments, otherwise it's in three instalments.

These same terms are used for the tax a business pays; Provisional and Terminal Tax.

Terminal Tax

If you own a business, and you and your partner are the shareholders, it may be beneficial to flow the income through to you as shareholder salaries. In this scenario, the company does not pay any tax but you as individuals will, and for your first year of trading this will be called Terminal Tax.

Withholding Tax

When you are contracting to someone, it’s likely they will deduct Withholding Tax from your invoices and send it to IRD, where it is held under your name. At the end of the year, when your total income less expenses is worked out, you will have a balance (profit) to pay tax on. The amounts that have been deducted from you throughout the year are allocated towards this tax bill. Often a refund will be due, as more tax will have been paid than the contractor owes.

Someone who earns wages or salary will have tax taken out every time they are paid. This is called Pay As You Earn (PAYE).

Goods & Services Tax (GST)

If you are a contractor, sole trader, in a partnership or you own a company, expecting to earn in excess of $60,000 over 12 months, you are required to register for GST. Once you're registered for GST you must issue tax invoices, charge GST on your sales and income and pay GST on your purchases and expenses. You also need to file regular GST returns, usually done on a two or six monthly basis, and keep records.

When you file your GST return, you’ll work out the difference between the amount of GST collected and the amount of GST paid to determine whether you need to return money to Inland Revenue or are due a refund.