Small business tax obligations in New Zealand can be tricky to navigate. Every year, thousands of Kiwi small businesses face penalties, interest charges, and cash flow crises because of avoidable tax mistakes—costing them thousands of dollars they could have kept in their business.
Whether you’re a sole trader, partnership, or small limited company, understanding where small businesses go wrong with tax can save you significant money and stress.
The good news? Most small business tax mistakes in NZ aren’t complicated. They’re the result of outdated assumptions, reactive rather than proactive thinking, or simply not having the right systems in place.
At WE Accounting, we work with small businesses across all sectors, helping them navigate NZ tax obligations efficiently. Here are the six most costly small business tax mistakes we see—and practical ways to avoid them.
Before diving into specific mistakes, it’s worth understanding what’s at stake for small businesses. Tax errors can result in IRD penalties, use-of-money interest charges, cash flow problems, audit triggers, and in serious cases, legal consequences. Let’s explore the most common pitfalls.
For growing small businesses in NZ, provisional tax is one of the most common surprises. Your business had a strong year, so IRD assumes next year will be similar—and wants tax paid in instalments throughout the year based on that assumption.
The problem? Your income might be lower this year, or lumpy, or heavily weighted to certain months. If you overpay provisional tax, you’ve tied up cash unnecessarily. If you underpay, you’re hit with use-of-money interest that compounds quickly.
Many small businesses simply pay what IRD tells them to pay without questioning whether it’s the right amount for their actual circumstances.
How to avoid it:
Review your provisional tax calculation method annually. The standard uplift method (last year’s tax plus 5%) isn’t always optimal. The estimation method gives you flexibility if your income is genuinely lower, while the ratio method can help if your income is uneven throughout the year. Work with your accountant to model which approach minimises both your cash tied up and your interest exposure. If your business circumstances change significantly mid-year, don’t wait until year-end to adjust—talk to your advisor about whether you should be revising your provisional tax position.
It seems straightforward: business expenses are deductible, personal expenses aren’t. In practice, the line gets blurry quickly. That dinner with a potential client where you also discussed your weekend plans—is it 100% deductible, 50%, or not at all? The home office you use every day but that also serves as a spare bedroom—what percentage can you legitimately claim?
IRD’s position is clear: expenses must be wholly and exclusively incurred in earning assessable income. “Mostly for business” isn’t good enough if there’s a private element. Getting this wrong leads to denied deductions in audits and, in serious cases, accusations of tax evasion.
How to avoid it:
Draw clear boundaries and document them. If you’re claiming a home office, measure it, photograph it, and calculate the business-use percentage based on actual floor space and usage patterns. For entertainment and meals, understand the 50% limitation and keep notes on who attended and what business purpose the expense served. For vehicles, maintain a logbook for at least 90 days to establish your business-use percentage. The more mixed-use an asset is, the more important your documentation becomes. When in doubt, be conservative—claiming 70% business use when it’s realistically 85% is better than claiming 100% and facing an audit adjustment.
Many small businesses start with no intention of hitting the $60,000 GST registration threshold. Then they have a good year, cross that threshold, and don’t realise they’re legally required to register—or they delay registration thinking they’ll deal with it later.
The consequences are significant for small businesses. You owe GST on income you’ve already received and probably spent, but you can’t claim back GST on past expenses unless you kept proper records. Some businesses find themselves owing tens of thousands in GST they didn’t budget for.
On the flip side, some small businesses register for GST too early because they’ve heard it makes them look more professional, without understanding the compliance burden and cash flow impact.
How to avoid it:
Monitor your rolling 12-month income carefully. If you’re approaching $60,000, plan ahead—register slightly before you hit the threshold so you can start claiming GST on purchases immediately. Keep all your purchase invoices even before registration; if you register within 6 months of starting business, you can claim GST on certain pre-registration expenses. If you’re well below the threshold and considering voluntary registration, run the numbers properly. Will you actually benefit from GST refunds, or will you end up paying more GST than you claim? Consider the administrative burden—monthly or two-monthly GST returns, proper invoice requirements, and record-keeping obligations.
“I know I had that invoice somewhere” is not a defense during an IRD audit. Poor record-keeping is one of the most common reasons businesses lose legitimate deductions or face penalties they could have avoided.
The specific traps include: mixing bank accounts, losing receipts, failing to keep mileage logs, not documenting the business purpose of expenses, and treating accounting software as an afterthought that you’ll “catch up on later.”
IRD’s powers to request information are extensive. If you can’t substantiate your claims, they’ll be denied—even if they were legitimate.
How to avoid it:
Implement systems that work with your workflow, not against it. Use cloud accounting software like Xero or MYOB that connects to your bank feeds so transactions are captured automatically. Take photos of receipts immediately and store them digitally linked to the transaction. Set up a separate business bank account and credit card—even if you’re a sole trader, the clear separation makes your life infinitely easier. Reconcile accounts monthly, not annually. This isn’t about being perfect; it’s about having a system that captures information when it happens rather than trying to reconstruct it months later. Schedule a quarterly file cleanup where you ensure all documentation is properly stored and linked. If you’re claiming vehicle expenses, keep a logbook in your car and update it as you travel—trying to reconstruct your business travel six months later never produces accurate results.
Fringe Benefit Tax (FBT) is one of the most misunderstood areas of small business tax in New Zealand. Many small businesses don’t realise that providing certain benefits to employees—company vehicles available for private use, subsidised insurance, low-interest loans, even free or discounted goods from your own business—triggers FBT obligations.
Others know FBT exists but calculate it incorrectly, use the wrong rate, or don’t understand they have quarterly filing obligations even if no FBT is due that period.
The penalty for getting FBT wrong isn’t just the unpaid tax—it’s interest, penalties, and the administrative headache of unwinding incorrect treatment over multiple periods.
How to avoid it:
Identify all benefits you provide to employees beyond salary. Company vehicles are the obvious one, but think broadly—gym memberships, phones available for private use, carparks in paid parking areas, employee discounts. Understand the different FBT calculation methods and choose the one most beneficial for your circumstances. The alternate rate method (63.93%) is simpler but might cost more than the single rate (49.25%) or multi-rate methods. If you’re providing benefits only to shareholder-employees, understand that different rules and options may apply. File FBT returns on time even if no FBT is due—missing a nil return still attracts penalties. Review your FBT position annually as your business changes—what made sense last year might not be optimal now.
Most businesses think about tax after the financial year closes. By then, your income is locked in, your expenses are fixed, and your opportunities to legitimately minimise tax are gone.
Smart tax planning happens before year-end, when you still have time to make decisions that optimise your tax position—accelerating expenses, deferring income where possible, writing off bad debts, reviewing depreciation claims, or making strategic decisions about asset purchases.
How to avoid it:
Schedule a pre-year-end tax planning meeting with your accountant at least six to eight weeks before your balance date. Review your projected profit and tax liability. Consider whether there are legitimate expenses you can bring forward—repairs and maintenance, professional subscriptions, planned asset purchases. Review your debtor list for genuinely bad debts that should be written off. Look at whether you have fully depreciated assets still on your books that could be disposed of. Consider timing around significant income or expenses that might shift between financial years. For shareholder-employees, review your salary and dividend strategy to ensure you’re extracting funds from the company in the most tax-efficient way. The key is giving yourself enough time to act—tax planning on March 25th for a March 31st balance date gives you very few options.
Tax mistakes rarely happen in isolation for small businesses. One error compounds another. Poor record-keeping leads to missed deductions. Missed deductions mean higher tax bills. Higher tax bills create cash flow pressure. Cash flow pressure leads to late payments and penalties. Penalties attract interest. Interest compounds.
Before long, what started as a simple oversight has cost your business thousands of dollars and significant management time dealing with IRD correspondence and corrections.
The small businesses that avoid these pitfalls aren’t necessarily more sophisticated or better resourced—they’re just more proactive about their tax obligations. They treat tax as a business consideration that deserves attention throughout the year, not something to think about once annually when the accountant asks for information.
Small business tax compliance in NZ doesn’t have to be complicated or stressful. With the right systems, proactive planning, and professional guidance, you can minimise your tax burden while staying fully compliant and avoiding costly mistakes.
At WE Accounting, we work with businesses across all sectors to make sure tax works for them, not against them. If you’d like to talk about your tax position, identify potential areas of concern, or just get a second opinion on whether you’re optimising your approach, we’d be happy to have that conversation.