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I’m a few years into existing as a GST-registered sole-trader with an online shop, stockists, in-person sales, and claiming pottery as a business expense on my tax return with IRD. This is alongside my day job(s) and PAYE income! When I started doing pottery 10+ years ago I had no idea what any of that meant and knew nothing of the business side of things. I’ve learnt a lot along the way and thought maybe some of my knowledge might benefit others.
This will be a series of posts focussing on different aspects of the business side of things. I am starting with tax – and how to get a refund from IRD! I’ll be adding to the series with posts about ecommerce platforms, website hosts, EFTPOS & credit card payments, and more!
If you make over $200 in a year in income from a source other than PAYE wages (a normal salary/job) you are required to declare it to IRD and identify yourself as self-employed. Yes that means you have to pay tax on that income, but it also opens you up to the ability to claim any business expenses against your total income, and often, claim a tax refund!
The first step in claiming business expenses is letting IRD know you are self-employed. If you have another job you will need to declare yourself ‘part-time self-employed’ to IRD. You can do this through the My IR portal by choosing ‘update my income type’.
Once you have added your status as self-employed you will be able to submit business expenses against for income in your yearly tax return. The tax year runs from 1st April to 31st March, so if you made $200 in that time period, you can claim all your expenses in that same period against you income.
As illustrated above, your self-employed expenses count against all your total sources of income, not just your self-employed income.
For example, if you earn $60,000 a year from your day job, and sell $200 of pottery, you will pay tax based on the assumption your income was $60,200 for the year. For most people in PAYE (pay-as-you-earn) roles the tax will automatically be deducted from your salary and paid to IRD in each of your paycheques. Your employer calculates the amount of tax to deduct and send to IRD based on your salary from them (or other reported sources).
However, if you spent $7000 on pottery related expenses (for example, setting up your website, buying clay, studio membership, workshops, etc.) your actual taxable income is reduced by $7000 to $53,200. This means you will get a refund from IRD as you will have overpaid your tax.
Please note this is entirely legal and businesses that earn a loss are normal, especially during the early stages of setting up a new enterprise.
IRD has some great resources on what you can claim as a business expense. Basically anything you spend that is for your business you can claim as an expense. Not only does this include materials, but it can include ‘research & development’, rent paid for a studio space, power & phone bills, and more. It’s important to keep good records so you can claim your expenses. This includes a GST receipt for any business related expenses (or photo of the receipt).
Business expenses can include:
- vehicle expenses, transport costs and travel for business purposes
- rent paid on business premises
- depreciation on items like computers and office furniture
- interest on borrowing money for the business
- some insurance premiums
- work-related journals and magazines
- membership of professional associations
- home office expenses
- work-related mobile phones and phone bills
- work uniforms
- tax agent’s fees.
It’s not hard to do these calculations yourself and file a tax return online. Most banks will allow you to download a spreadsheet of all your transactions within a certain period. From there, categorise them into business expenses & business income, and fill in the relevant fields in the IRD’s online tax return.
Please note that if you do turn over a significant amount of income – if your business makes a profit – you will owe IRD a tax bill! For the first 3 years of filing my taxes as a self-employed potter I filed business losses of $5-10K, usually getting tax refunds between $2k and $4k. However the year I finally started making a profit I definitely owed IRD quite a bit! The amount will depend on your total income and your tax bracket. It’s good to keep that in mind and have some savings set aside to pay the tax bill when it comes around if you do have a bumper year!
I’m not going to go into GST here but basically it’s a pain and when I have to become GST registered (over $60K in turnover) I decided it was too complicated to do myself and started using Hnry for my accounting. Now that I have gotten my head around GST a bit more I think I could do it myself, and I might start next year. Ultimately it costs me a lot to be GST registered and yes I get to claim GST back on any business purchases I make but the time required for the accounting side of it and expense really don’t balance out!
I hope this is useful to some people and helps dispel any fear of reporting income and claiming tax benefits. It has been really worthwhile for me. Yes I now have to pay IRD a lot of money every year which is not awesome!! But that means my business is legit, and when I was first setting it up and spending lots on getting a wheel and a kiln and all that stuff I was able to claim that against my income and get some money back at the end of the year when I was a poor newbie potter. And if I did have a year where I didn’t earn heaps and my business earned a loss I could get some of my income tax paid to IRD back 🙂
Nice to meet you. (I”ve been looking for a beginners course in spinning ceramics – but you’re done with that I see)
Don’t forget that all those things that you bought when you didn’t make much income belong to your business, so if you sell them sometime in the future you’ll have to claim that as income.
Owing heaps of money to the IRD is a great thing. I’ve always wanted to owe them $1,000,000!. That would mean that I made about $4,000,000 leaving me $3,000,000 as profit!
Years ago an accountant told me I wanted to avoid registering for GST until I had to as it meant more effort and, I think, more tax.
Anyway, I’m glad I found your little space and will keep an eye on it.
Celebrate owing the government money! At least in New Zealand is mostly goes towards good stuff.