A Practical, Officially Sourced Guide to Structuring, Deductions, and Compliance for the 2025/26 and 2026/27 Years
This brief outlines New Zealand tax settings based on official sources from Inland Revenue (IRD), the Income Tax Act 2007, the Goods and Services Tax Act 1985, and Budget and Treasury papers. It is not tax advice. Tax outcomes depend on your own situation, and the methods described here are acceptable only where there is genuine business substance behind them. Arrangements that lack real commercial purpose and exist mainly to get around tax law may be set aside by the Commissioner under the general anti-avoidance rule in sections BG 1 and GA 1 of the Income Tax Act 2007. Rates and thresholds are correct as at July 2026 and change often. Check current figures at ird.govt.nz and get advice from a chartered accountant or tax agent before taking any action.
New Zealand's tax system is broad and, by international standards, lightly taxed. It has no general capital gains tax, no stamp duty, no payroll tax, no social security charges, and no tax-free threshold. These features mean that legitimate tax planning for a small or medium business (SME) and its owners rarely involves complex structures. It centres on three practical steps: picking the right business structure, claiming every deduction the business genuinely qualifies for, and managing timing and paperwork to avoid interest and penalties.
This brief brings together the current rules in the areas that matter most to owner-operated businesses and their owners. It covers the personal income tax scale; the choice of business structure (sole trader, partnership, company, look-through company, and trust); GST and provisional tax (tax paid in instalments during the year); deduction rules including the 2025 Investment Boost; employment-related taxes (PAYE, FBT, KiwiSaver); investment income; property settings; the Research and Development Tax Incentive; and the anti-avoidance rules that set the boundaries of all planning.
The key point is that since the top personal rate and the trustee rate were both set at 39 percent (from the 2024/25 income year), there is much less room to gain by shifting income between individuals, trusts, and companies. The company rate of 28 percent is still below the top personal rate, but for a shareholder on the 39 percent rate this is only a delay, not a permanent saving: when company profits are paid out as dividends, extra tax tops up the total to 39 percent. The lasting gains now come from picking the right structure for the owner's actual income pattern; claiming all deductions with proper records; splitting income with family members who genuinely work in the business; paying provisional tax on time to avoid interest charges; and using the specific incentives (Investment Boost, the R&D Tax Incentive, and KiwiSaver) that Parliament has deliberately provided.
New Zealand uses a progressive scale with five brackets and no tax-free threshold, so tax is paid from the first dollar earned. The lower three thresholds were lifted on 31 July 2024 and apply for the full 2025/26 income year (1 April 2025 to 31 March 2026). The 39 percent top rate, applying above $180,000, has been in place since 1 April 2021.[1] No further bracket changes were made in Budget 2025.
| Taxable income (2025/26) | Marginal rate | Tax on band |
|---|---|---|
| $0 to $15,600 | 10.5% | $1,638 |
| $15,601 to $53,500 | 17.5% | $6,632.50 |
| $53,501 to $78,100 | 30% | $7,380 |
| $78,101 to $180,000 | 33% | $33,627 |
| Over $180,000 | 39% | 39 cents per dollar above $180,000 |
Because the scale is progressive, the average (effective) rate is always below the top (marginal) rate. A person on $80,000 pays approximately $16,278 in income tax, an effective rate of about 20.3 percent, while their marginal rate is 33 percent. This gap is what makes two of the most reliable planning tools possible: splitting income across two taxpayers so that more of it falls into the lower brackets, and spreading income across years so that no single year is pushed unnecessarily into the 39 percent band.
Separately from income tax, the ACC earners' levy funds cover for non-work injuries. It is deducted through PAYE or paid by the self-employed. For 2025/26 the rate is 1.67 percent on earnings up to a maximum of $152,790, giving a maximum levy of $2,551.59. The rate rises to 1.75 percent for 2026/27, with the cap increasing to $156,641 (maximum levy $2,741.22).[2] The levy is often overlooked when owners compare the true cost of taking salary versus other forms of income, and it is a genuine cost that should be built into any pay comparison.
The Independent Earner Tax Credit (IETC) provides up to $520 per year to individuals who are not receiving a main benefit, Working for Families, or New Zealand Superannuation. From 31 July 2024 the full credit applies for income between $24,000 and $66,000, then phases out by 13 cents per dollar between $66,001 and $70,000, reaching nil at $70,000.[3] Salary and wage earners claim it through the ME tax code; the self-employed claim it in their IR3 return. It is modest but often missed by owners who earn income near the qualifying band.
The single most important structuring decision for an SME owner is the choice of trading structure, because it determines the tax rate on profits, the ability to split income, whether losses can be used, and the compliance burden. The four common options are the sole trader, the partnership, the company (including the look-through company), and the trust.
| Feature | Sole trader | Company | Look-through company (LTC) | Trust |
|---|---|---|---|---|
| Tax rate on profit | Owner's personal rate (up to 39%) | 28% flat | Owner's personal rate (looked through) | 39% trustee rate; 33% for de minimis trusts |
| Losses | Offset against owner's other income | Trapped in company; carried forward | Flow through to owners (subject to loss limitation) | Generally trapped in trust |
| Income splitting | No | Via salaries and dividends to shareholders | By shareholding proportion | Via beneficiary income allocations |
| Liability | Unlimited personal | Limited (subject to guarantees) | Limited (company law), but tax looked through | Asset protection via separation of legal and beneficial ownership |
| Compliance cost | Low | Higher (IR4, imputation, minutes) | Higher (IR7 plus owner returns) | Higher (IR6 plus disclosure rules) |
A widespread misconception is that incorporating automatically saves tax because 28 percent is lower than the top personal rates. This is only partly true. For an owner whose marginal rate is 33 percent or below, the blended personal rate is often below 28 percent, so a company can increase current tax on distributed profit. The company advantage arises where profits are kept in the business and reinvested, and where the owner's personal income would otherwise fall in the 39 percent band.
The figure shows how this works. On $250,000 of profit a sole trader pays approximately $76,600 of income tax. A company that keeps the full amount pays $70,000 (28 percent), a current-year delay of about $6,600. A common approach is to pay the owner a $180,000 salary (taxed personally) and keep $70,000 in the company at 28 percent. The delay is real and useful for reinvestment, but it is not a permanent saving for a top-rate shareholder. When the retained $70,000 is paid out as a dividend, the 28 percent imputation credit (a credit for tax the company has already paid) is topped up to 39 percent, so the combined company-plus-shareholder tax on that profit reaches 39 percent regardless. The genuine, lasting benefit of the company lies in three things: delaying tax while profits fund growth, limited liability, and legitimate income splitting where a spouse or family member is a genuine shareholder or employee.
An LTC is a close company that elects to be transparent for income tax: profits and losses flow through to owners in proportion to their shareholding and are taxed at their personal rates.[12] This is valuable when a business is expected to make early losses that owners want to offset against other income, subject to the LTC loss limitation rule. It also removes the dividend top-up problem because there is no separate company-level tax. The trade-off is loss of the tax-delay benefit and additional complexity, so the LTC suits loss-making start-ups and certain investment structures rather than profitable trading companies that are keeping earnings.
Since the 2024/25 income year the trustee tax rate has been 39 percent, matching the top personal rate, with a small-threshold (de minimis) concession retaining the 33 percent rate where trustee income (after deductible expenses) does not exceed $10,000. Note the cliff: if trustee income is $10,001, the entire amount is taxed at 39 percent, not just the excess.[4] Deceased estates are taxed at 33 percent for the year of death and the following three years, and trusts settled for disabled beneficiaries remain at 33 percent. A corporate beneficiary rule taxes certain close-company beneficiary income at 39 percent to prevent diverting income around the trustee rate.
The practical consequence is that trusts are no longer a way to shelter income from tax at lower rates. Their continuing value is in asset protection, succession, and relationship-property planning, and in passing beneficiary income to beneficiaries who are on lower personal rates, provided those allocations are genuine and the minor beneficiary rule (which taxes most trust income allocated to under-16s at 39 percent) does not apply.
GST is a 15 percent tax on most goods and services. Registration is compulsory once your taxable sales (supplies) exceed $60,000 in any 12-month period, based on either the past 12 months or a reasonable estimate of the next 12 months, with registration required within 21 days of crossing the threshold.[5] Businesses below the threshold may register voluntarily to recover the GST they paid on purchases, which is often worthwhile for capital-intensive start-ups whose customers are themselves GST-registered.
Filing frequency is monthly (mandatory above $24 million turnover), two-monthly (the default for most SMEs), or six-monthly (available where turnover is $500,000 or less). The key choices here are the accounting basis (payments, invoice, or hybrid) to match your cash flow, and matching filing frequency to the business's working-capital cycle so that GST refunds on large purchases come back quickly rather than being tied up for months.
A taxpayer whose residual income tax (RIT, the tax left after all credits) exceeds $5,000 in a year moves into provisional tax for the following year, paying in instalments (typically 28 August, 15 January, and 7 May for a 31 March balance date). Under the standard uplift method, provisional tax equals 105 percent of the prior year's RIT, or 110 percent of the RIT from two years earlier where the most recent return has not been filed.[6]
Where a taxpayer's prior-year RIT is under $60,000, paying the standard uplift instalments in full and on time protects them from use-of-money interest (UOMI), even if actual tax turns out higher: the shortfall is simply paid as terminal tax with no interest. From 16 January 2026 the UOMI underpayment rate is 8.97 percent and the overpayment rate is 2.25 percent.[7] At 8.97 percent, an unmanaged shortfall is expensive. The disciplined approach for most SMEs is to use standard uplift, pay on time, and rely on the safe harbour rather than trying to estimate down, which forfeits the safe harbour and exposes the whole shortfall to interest.
For businesses with lumpy or seasonal income, the Accounting Income Method (AIM) lets provisional tax be calculated from actual year-to-date results through approved accounting software, so tax is paid only when profit is actually earned. This avoids overpaying early in a soft year and is well suited to businesses with volatile margins, at the cost of tighter bookkeeping discipline.
Under the general permission in section DA 1 of the Income Tax Act 2007, spending is deductible to the extent it is incurred in earning assessable income or in carrying on a business for that purpose.[21] For most SMEs the largest and most reliable tax savings come not from structure but from claiming every legitimate deduction with adequate records. The rules below are the ones most often applied incorrectly.
Introduced in Budget 2025, the Investment Boost allows a business to deduct 20 percent of the cost of an eligible new asset in the year it is first used or available for use, then depreciate the remaining 80 percent under normal rules.[22] The asset must be new, or new to New Zealand (imported second-hand assets qualify), first available for use on or after 22 May 2025, and depreciable under IRD rules. Residential buildings, land, and trading stock are excluded, and the 20 percent claimed reduces the asset's cost base for future depreciation.[8] There is no cap and no application process, and the deduction is available to any business that pays tax in New Zealand.
The Boost is a timing benefit rather than a permanent one: total deductions over the asset's life are unchanged, but bringing 20 percent forward improves cash flow and, at a 28 percent company rate, brings roughly $5,600 of tax benefit on a $100,000 asset into year one. For capital-intensive SMEs planning equipment purchases, the two things that matter are timing acquisitions on or after 22 May 2025 and ensuring the asset is genuinely available for use before balance date.
Motor vehicles. Sole traders and partnerships can claim business running costs using either actual costs with a logbook, or IRD's kilometre rates. For 2025/26 the Tier 1 rate (first 14,000 km, combining fixed and running costs) is $1.20 for petrol, $1.30 for diesel, 90 cents for petrol hybrid, and $1.22 for electric; Tier 2 rates for travel beyond 14,000 km are lower.[9] Companies cannot use the kilometre-rate method: they must use actual costs and account for fringe benefit tax (FBT) where a vehicle is available for private use.
Home office. Where a business is run from home, a share of household costs (rates, insurance, power, mortgage interest or rent) is deductible based on the area used for business. IRD also publishes a square-metre rate option that simplifies the calculation. The deduction is legitimate and often under-claimed by owners who work from home part of the week.
Entertainment. Most business entertainment is only 50 percent deductible, including client meals, corporate boxes, and staff social functions, because it has a private element.[10] Full deductibility applies in specific cases, including entertainment consumed while travelling on business (unless with a business contact), food and drink at a conference of at least four hours, entertainment that promotes the business to the public on equal-access terms, and entertainment enjoyed outside New Zealand. Misclassifying 50 percent items as fully deductible is a common and easily corrected error.
A shareholder-employee of a close company can be paid by PAYE salary, by a shareholder salary paid without PAYE (with the tax managed through provisional tax), or by a combination of both, alongside dividends. The choice affects cash-flow timing, ACC levy exposure, KiwiSaver eligibility, and the ability to use the lower tax brackets. Setting a reasonable salary that uses the owner's lower personal brackets, while keeping surplus profit in the company for reinvestment, is a standard and defensible approach, provided the salary reflects genuine services and the company can fund it.
Non-cash benefits provided to employees (most commonly a vehicle available for private use, low-interest loans, and subsidised goods) attract FBT. Employers can use the single rate of 63.93 percent on all benefits, or the alternate-rate process at 49.25 percent with a fourth-quarter attribution calculation that aligns the FBT cost to each employee's actual marginal rate.[11] For owner-operated companies where the owner is a high earner, the single rate is simpler; where benefits go to employees on lower incomes, the alternate-rate calculation can meaningfully reduce the FBT cost. Small close companies meeting the eligibility criteria can also elect to file FBT on an annual or income-year basis, reducing compliance frequency.
Budget 2025 changed KiwiSaver in ways that directly affect owners and their staff. From 1 July 2025 the government contribution halved to 25 cents per dollar contributed, with a maximum of $260.72 per year (requiring member contributions of at least $1,042.86), and members with taxable income over $180,000 no longer receive it. The default employee and matching employer contribution rate rises from 3 percent to 3.5 percent on 1 April 2026 and to 4 percent on 1 April 2028, with a temporary option to opt down to 3 percent. Employer contributions and the government contribution were extended to 16 and 17-year-olds.[13]
For the owner, the compulsory employer contribution is a real and rising cost of employing staff that should be built into wage budgeting from 1 April 2026. For the owner personally, contributing at least $1,042.86 a year to capture the full government contribution remains a straightforward return where income is at or below $180,000. Employers should also check whether employment agreements state pay on a total-remuneration basis, which affects who bears the increased contribution.
Income from a multi-rate portfolio investment entity (PIE), including most KiwiSaver funds and managed funds, is taxed at the investor's prescribed investor rate (PIR) of 10.5, 17.5, or 28 percent, based on income in the previous two years. The maximum PIR is 28 percent, and if no PIR is supplied the default 28 percent applies.[14] For an investor whose top personal marginal rate is 33 or 39 percent, the 28 percent PIR cap is a genuine and legitimate rate advantage: investment income earned through a PIE is taxed at up to 28 percent rather than the investor's higher personal rate. Conversely, an investor on a lower rate should use their correct PIR: since the 2019/20 year IRD performs an automatic end-of-year calculation that squares up PIE tax, so an incorrect PIR is fixed at year end rather than left as a permanent over or under payment, but using the correct rate avoids an interest-free overpayment during the year.
Resident withholding tax (RWT) is deducted at source from interest and dividends. On interest, individuals can elect a rate matching their marginal rate (10.5 to 39 percent); the default where no rate or IRD number is supplied is 33 percent (45 percent with no IRD number). On dividends, RWT is 33 percent, reduced by any imputation credits attached.[15] Imputation credits represent company tax already paid at 28 percent, preventing the same profit from being taxed twice: the shareholder grosses up the dividend, claims the credit, and pays the difference to their own marginal rate. For a 39 percent shareholder this produces the 11 percentage-point top-up described in Section 3. The practical point for owners is to choose the correct RWT rate on personal interest to avoid a year-end bill or an interest-free loan to IRD, and to track the company's imputation credit account so that dividends are paid fully imputed where possible.
Two recent reversals matter for owners holding residential investment property. First, interest deductibility on residential rental property, which was removed from 2021, has been fully restored: an 80 percent deduction applied for the 2024/25 income year and 100 percent from 1 April 2025 onward.[16] Second, the bright-line test, which taxes gains on residential property sold within a set period as income, was reduced to two years for disposals from 1 July 2024.[17] Residential rental losses remain ring-fenced, meaning they can offset only residential property income rather than the owner's other income. These settings restore much of the pre-2021 tax treatment of leveraged residential investment, though the absence of a general capital gains tax should not be mistaken for the absence of any tax on property gains: the bright-line test, the intention-to-resell rules, and the land dealing and development provisions can all tax property profits.
The R&D Tax Incentive (RDTI) provides a 15 percent tax credit on eligible R&D spending, subject to a minimum spend of $50,000 per year (waived where R&D is contracted to an Approved Research Provider) and a cap of $120 million of eligible expenditure. The activity must be conducted in New Zealand and meet the statutory definition of core R&D. Smaller loss-making companies can access a refund of up to $255,000, corresponding to $1.7 million of eligible expenditure.[18] For genuinely innovative SMEs, particularly in software, engineering, and manufacturing, the RDTI is the most valuable single incentive available, but it requires activities and spending to be documented and approved through the formal enrolment and claim process, so it rewards businesses that plan their R&D record-keeping in advance.
A specific integrity rule prevents individuals from sheltering personal services income in an associated company or trust to access the 28 percent company rate. Under sections GB 27 to GB 29, income is attributed back to the working person where 80 percent or more of the entity's personal services income comes from a single buyer (and associates), 80 percent or more comes from services personally performed by the working person or a relative, the working person's net income exceeds $70,000, and no substantial business assets are required to earn the income.[19] Contractors who put a company between themselves and one client are the primary target. The rule does not apply where income genuinely comes from multiple unrelated clients, which is one reason a diversified client base is both good business and good tax practice.
A company can carry losses forward if at least 49 percent of voting shares are maintained (the shareholder continuity test). Since the 2020/21 year, the business continuity test provides an alternative: losses survive a breach of ownership continuity provided there is no major change in the nature of the business within five years of the ownership change.[20] This matters for growing SMEs raising capital, where new investors would otherwise breach the 49 percent threshold and forfeit accumulated losses. Imputation credits have a separate, stricter 66 percent continuity requirement that is not covered by the business continuity test.
Every method in this brief is legitimate where it reflects genuine commercial and personal reality. The general anti-avoidance rule (sections BG 1 and GA 1) allows the Commissioner to set aside arrangements whose main purpose is to get around the intent of the Act, even where each step follows the letter of the law.[21] The Supreme Court's approach in Ben Nevis and the earlier Penny and Hooper case confirms that artificially low shareholder salaries, income diverted to family members who do no work, and structures with no purpose beyond tax reduction are vulnerable. The safe path is substance: genuine services for salaries, genuine shareholdings for dividends, genuine work for family pay, and contemporaneous documentation for every position taken.
Drawing the threads together, the following sequence captures the durable, low-risk levers for a typical New Zealand SME and its owners, in order of reliability.
| Priority | Lever | Who benefits most | Nature of benefit |
|---|---|---|---|
| 1 | Claim all legitimate deductions with records (home office, vehicle, Investment Boost, correct entertainment split) | Every business | Permanent; largest aggregate saving |
| 2 | Use the provisional tax safe harbour; pay standard uplift on time | RIT under $60,000 | Avoids 8.97% interest; permanent |
| 3 | Match entity to income profile (company for retained-profit, high-rate owners; LTC for early losses) | Owners near or above $180,000 | Deferral plus liability and splitting |
| 4 | Split income with genuinely active family members | Family businesses | Permanent; must reflect real work |
| 5 | Use the 28% PIR cap for investment income | Investors on 33% or 39% | Permanent rate advantage |
| 6 | Capture the KiwiSaver government contribution and R&D Tax Incentive where eligible | Owners and innovative firms | Statutory incentives |
| 7 | Time capital purchases and income recognition across balance dates | Capital-intensive and lumpy-income firms | Timing; cash flow |
Several caveats apply to the positions in this brief.
Rates and thresholds change often. The figures here reflect the 2025/26 and 2026/27 years as legislated by July 2026. Bracket thresholds are not indexed to inflation, so fiscal drag (the effect of inflation pushing income into higher brackets over time) will continue to raise effective rates until the next discretionary adjustment. KiwiSaver contribution rates rise again in 2028, and the ACC levy schedule increases through to 2027/28.
Policy direction is live. New Zealand has no general capital gains tax, but the question is always debated, and any future introduction would significantly change the relative appeal of property, shares, and business sale proceeds. The interest deductibility and bright-line settings have reversed twice in five years, showing how quickly property tax settings can shift with the election cycle.
Individual facts dominate. The best structure for one owner can be wrong for another with the same income, because of family circumstances, risk profile, exit plans, and existing entities. The worked figures are illustrative and use simplifying assumptions (single owner, single balance date, income tax only, no other income). They are not a substitute for a calculation on the taxpayer's actual position.
Substance is decisive. The biggest risk in tax planning is not getting a rule wrong but setting up a structure without the real commercial substance to support it. Every position should be able to answer the question the Commissioner will ask: is this arrangement what it claims to be, and would a business person have entered it for reasons beyond tax? Where the honest answer is no, the arrangement should not be adopted.
This report contains no scraped, sampled, or estimated data. Every value is either a statutory rate or threshold copied directly from an official source, or a figure calculated from those statutory parameters using standard New Zealand income tax arithmetic. The datasets behind each figure are provided below as downloadable CSV files so the numbers can be checked and reused.
Personal income tax (Table in Section 2.1 and Figure 1). New Zealand's scale is progressive with no tax-free threshold, so total tax is the sum across bands of the income taxed in each band multiplied by that band's 2025/26 rate. As a worked check, tax on $60,000 is (15,600 x 10.5%) + (37,900 x 17.5%) + (6,500 x 30%) = $10,220.50, which matches IRD's own published example for a $60,000 earner. The effective (average) rate is cumulative tax divided by income. These figures are income tax only; the ACC earners' levy is charged separately.
Entity comparison (Figure 2). On $250,000 of profit for a single owner with no other income: the sole trader pays $76,577.50 (all at personal rates); the company retaining all profit pays $70,000 (28%); the hybrid pays $49,277.50 personal tax on a $180,000 salary plus $19,600 on $70,000 retained at 28%, totalling $68,877.50. The company and hybrid figures are a delay, not a permanent saving, because distributing retained profit to a 39% shareholder adds an 11 percentage point dividend top-up.
Investment Boost (Figure 3). For an illustrative $100,000 eligible asset with a 10% diminishing-value rate, the year-one deduction without the Boost is $10,000, and with the Boost is $20,000 upfront plus $8,000 on the remaining $80,000, totalling $28,000. Lifetime deductions are unchanged; the Boost brings them forward.
KiwiSaver and headline rates (Figures 4 and 5). These are direct copies of statutory rates with no calculation involved.
All statutory parameters were verified against the official sources in the reference list, with every URL confirmed live on 9 July 2026. The master parameter file records the applicable period and source URL for each value.
| Dataset | Used in | Download |
|---|---|---|
| Master list of all headline rates and thresholds, with source URLs | Whole report | key_tax_parameters_2025_26.csv |
| 2025/26 personal income tax bands | Section 2.1 table | table1_personal_tax_brackets_2025_26.csv |
| Marginal and effective rate by income level | Figure 1 | figure1_marginal_effective_rates_2025_26.csv |
| Current-year tax on $250,000 by structure | Figure 2 | figure2_entity_tax_comparison.csv |
| Investment Boost year-one deduction | Figure 3 | figure3_investment_boost_year_one.csv |
| KiwiSaver default contribution rate by date | Figure 4 | figure4_kiwisaver_default_rate.csv |
| Headline tax rate by income vehicle | Figure 5 | figure5_headline_rates_by_vehicle.csv |
| Data construction notes and methodology | All figures | README.md |
Because there is no random process, seed, or external pipeline, every derived figure can be reproduced from the statutory parameters using the arithmetic in Section 12.1 and the data README. All monetary values are in New Zealand dollars.