Many businesses fail because they don’t manage their tax obligations properly. If you’re in business, it’s essential to understand how much tax you’ll pay, how it’s calculated, when it’s due, and what methods are available to manage your payments.

All businesses in New Zealand are required to pay income tax on their net profit. This applies whether you’re operating as a sole trader, partnership, or company. The business tax NZ system is straightforward, but the rate you pay depends on your business structure.

In this article we’ll explain:

• Different business structures and how they are taxed in NZ
• Taxable Profit – What it is and how it’s calculated
• Income Tax Rates – For individuals / sole traders, companies and trusts
• Example: Tax on Net Profit Calculation
• Understanding Tax Payments: Residual Income Tax, Terminal Tax and Provisional Tax
• Provisional Tax Calculation Methods
• Common Frequently Asked Questions

Different Business Structures and How They Are Taxed

Companies

The company tax rate NZ is set at 28% of a company’s net profit. This flat rate applies regardless of whether you’re a large corporation or a smaller company.

When shareholders receive dividends, they may also need to pay personal income tax on these, with imputation credits available to avoid double taxation.

Sole Traders

If you are a sole trader, your business income is taxed at your individual marginal tax rates. This is referred to as the sole trader tax rate NZ, which is based on the same income tax brackets that apply to all individuals.

This means that your business profits are added to any other income you earn, and taxed progressively.

Partnerships

Partnerships do not pay tax directly. Instead, each partner includes a share of the partnership’s net income in their personal tax return. This is another form of business tax that is important to understand if you are not trading as a company.

Business Tax Considerations

Which structure is right for you depends on your income, industry, and long-term plans. For smaller operators, understanding the small business tax rate NZ is essential – whether you trade as a sole trader, partnership, or register a company.

Seeking advice before setting up your business can save you time, money, and compliance headaches in the future.

Taxable Profit – What Is It?

Your business pays income tax on its net profit. This is the total income from sales (revenue) minus deductible business expenses.

Example:

Revenue (Sales): $150,000
Less Expenses: ($50,000)
Equals: Taxable Profit $100,000

Expenses can include materials, wages, rent, utilities, accounting fees, marketing, and other operating costs. These are typically classified as:

• Direct costs – Directly tied to delivering your product/service (e.g. raw materials or subcontractors).
• Indirect costs – General business costs like rent, admin wages, or insurance.

Calculating Income Tax

The amount of tax you pay depends on your business structure.

1. Company

• Companies pay a flat 28% tax rate on taxable profit.
• If your company made $100,000 profit, it would owe $28,000 in income tax.

2. Trust

• Trusts pay a flat 33% on retained income.
• A trust earning the same $100,000 profit would pay $33,000 in tax.

3. Individual (Sole Trader / Partnership)

Sole traders and partnerships pay tax at marginal individual rates. As of 2025:

Example: Tax on Net Profit Calculation

Tax on $80,000 net profit (Tax for Sole Trader)

Understanding Income Tax Payments

There are three key terms to know:

1. Residual Income Tax (RIT)

This is the total income tax you owe for the year, before subtracting any provisional tax payments.

2. Terminal Tax

Terminal tax is the final payment made to settle the tax owed after provisional payments.

For example, if your RIT is $20,000 and you’ve paid $15,000 in provisional tax, your terminal tax is $5,000.

Terminal tax is usually due 7 February after the end of the tax year (or 7 April if you have a tax agent extension).

3. Provisional Tax

If your RIT is over $5,000, you’ll likely be required to pay provisional tax during the next year.

Provisional Tax – Four Calculation Methods

1. Standard Method (Default)

This uses your last year’s RIT plus 5%.

If your 2024 RIT was $12,000, your 2025 provisional tax is $12,600.
This would be split into three equal instalments (typically August, January, and May).

2. Estimation Method

Estimate your expected RIT and pay tax based on that.

• Useful if you know income will drop
• IRD may charge interest or penalties if you underpay without reasonable cause

3. Ratio Method

For GST-registered businesses using a two-monthly filing cycle, this method calculates provisional tax as a percentage of GST-inclusive sales.

If your previous RIT was $30,000 and GST-inclusive sales were $1.2m, your ratio is 2.5%. ($30,000/$1,200,000 = 2.5%).  You’d pay 2.5% of current sales as provisional tax.

• Helps cashflow – payments rise and fall with sales volume.

4. Accounting Income Method (AIM)

Available to businesses using IRD-approved software (like Xero).
Provisional tax is calculated based on actual profit, and filed monthly or two-monthly with GST.

• Ideal for new businesses or those with fluctuating income
• More accurate – based on real-time performance

Frequently Asked Questions

Do you pay tax when you sell a business in NZ?

There is no general capital gains tax in New Zealand. However, if you sell depreciable business assets or stock for more than their book value, this gain may be taxable. Selling company shares is usually not taxed unless you’re in the business of share trading.

How do self-employed people pay tax in NZ?

Self-employed individuals file an IR3 tax return each year and pay tax based on their net profit. If their tax bill exceeds $5,000, they may need to pay provisional tax in the following year.

What is terminal tax?

Terminal tax is the final payment needed to balance your income tax account. It’s due after the end of the financial year – usually by 7 February (or 7 April with an accountant).

What are the provisional tax due dates?

For most taxpayers with a 31 March balance date:

• 28 August
• 15 January
• 7 May
  Businesses on six-monthly GST periods only pay twice:
• 28 October
• 7 May

What happens if I miss a tax payment?

IRD may charge interest and late payment penalties if you miss a provisional or terminal tax deadline. Contact your accountant early to manage payment arrangements.

Need Help Navigating Your Business Tax?

Tax doesn’t need to be overwhelming – especially with the right support.

At ABA Chartered Accountants, we provide:

• Startup advice for new businesses
• Accounting and taxation services
• Advice on business structures

Whether you’re self-employed, operating through a company, or planning to sell your business – we’re here to help.

Get in touch with the friendly team at ABA Chartered Accountants today.