You don’t pay tax in your first year of business…right?

Let’s clear this up

I hear this all the time from people just starting out: “You don’t pay tax in your first year of business… right?”

Here’s the truth while it is possible not to pay tax in your first year, it really depends on how your business is doing. So let’s break it down.

In New Zealand, if you earn $200 or more from selling products or services in a year, you’re required to file an Income Tax Return with the IRD. Every year. Yep, even your first one.

Now, here’s where it gets good: any business expenses you’ve bought throughout the year can be deducted from your income.

For example:
Income: $200
Expenses: $250
Result: -$50 (Loss)

If your expenses are more than what you earned, you won’t pay income tax. In fact, you might even get a refund from IRD.

This is usually what people mean when they say “you don’t pay tax in your first year.” Most startups actually lose money in year one because you’re investing in your business to get it off the ground. But that doesn’t mean every business will follow this pattern.

If your business crushes it in the first year, it might look more like this:
Income: $200
Expenses: $50
Result: $150 (Profit)

In this case, your profit is what you pay tax on. So here, you’d pay tax on $150 the amount left after subtracting all your expenses from your income.

So the takeaway?

• Earn $200+ in income = you need to file a tax return

• Profit = you pay tax on the profit

• Loss = no tax, maybe even a refund

Bottom line: just because it’s your first year doesn’t automatically mean zero tax. It all comes down to how much you earn vs. how much you spend.