Tax tips
The list below identifies a number of year end issues together with important tax reminders.
Bad debts
Have you written off all debts that you consider are 'bad'? Individual trade debts should be reviewed and actually written off in your debtors ledger prior to 31 March for them to be allowed as a deduction in that financial year. A debt is considered bad if a reasonable and prudent business person would be of the view that it is unlikely that the debt will be paid. Factors to consider are the length of time the debt is outstanding, and the efforts you have taken to collect the debt.
Companies – Structural changes
Shareholder continuity must be maintained for tax losses and imputation credits to be carried forward. The minimum continuity thresholds are 49% and 66% respectively. A new “business continuity test” now applies as a backup to carry forward tax losses.
Dividend timing
If your company wants to declare a dividend with a payment date of 31 March or earlier, please note that the dividend documentation has to be actually signed on or before the payments date.
Donations
Companies (other than LTC's) are allowed a deduction for gifts of money made during the year to approved organisations, to the extent of the company's taxable income for the year.
Employee wages and leave
An employer can obtain a deduction for employee-related expenses that are owing at year end, e.g. holiday pay, bonuses, long service leave, providing payment is made within 63 days after year end. Therefore, if you have a 31 March balance date, a deduction if permitted if the payment is made on or before 2 June.
Fixed assets – Assets no longer used in the business
For tax purposes fixed assets can be written off if:
the asset is no longer in use by the business; and
is not intended to be used in the future; and
the cost of disposing of the asset would be more than its disposal value.
We recommend assets be reviewed for use, to determine whether or not a deduction would be available.
Fixed assets – Low value assets
Low value assets, with a value of $1,000 (from 17 March 2021) or less, can be written off immediately. This is providing that:
The asset is not an upgrade or part of a wider asset; or
the acquisition is not part of a wider acquisition of the same asset from the same supplier, with the same depreciation rate.
Fixed assets – Purchases and sales
A full month's depreciation can be claimed for any part month that an asset is owned and used. It may be worth buying replacement assets on or just before 31 March to obtain one month's worth of depreciation deduction. If you expect to make a loss on sale, consider selling prior to balance date. If you expect to make a gain on sale, consider deferring the sale until after balance date. This will accelerate any available deduction or decelerate the requirement to return taxable income.
Higher income
Is your income significantly higher than the previous year? If so, you should consider whether an additional voluntary provisional tax payment may be appropriate or alternatively it may be beneficial in aligning your tax payments with turnover. Please discuss this with us before 31 March. If you have underpaid your provisional tax for the year then it may be possible to use a provisional tax intermediary to save IRD Use of Money Interest costs.
Interest
Have you paid more than $5,000 in interest to someone other than a bank? If you have, you may be required to withhold resident withholding tax (RWT).
Legal fees
Not all legal fees incurred by a business may be claimed as a deductible expense, for example, fees in relation to forming a company or trust and capital asset purchases; these are considered capital in nature for tax purposes ("capital limitation"). Legal fees should be reviewed for deductibility. The capital limitation can be ignored for qualifying legal expenses if the year's total expenditure on all qualifying legal expenses does not exceed $10,000 (excluding GST).
Loan accounts and current accounts
If your company has loan accounts which have debit balances (including overdrawn current accounts), there could be undesirable tax consequences. Please contact us to find out whether there might be problems, and how they can be avoided.
Overseas investments
Do you have any investments or interests in overseas entities? The tax treatment of overseas investments is complicated and dependent on the method required to calculate the income. You should review the tax treatment of your foreign investments such as equities, superannuation or life insurance policies and consider any changes that may have been made within the year. Obtain specific tax advice prior to making changes especially if considering a lump sum withdrawal or transfer from an overseas pension.
Payments to contractors
The PAYE and withholding payment rules apply to a wide range of contractors. Because of the penalty and use of money interest regimes, it is particularly important that you ensure the rules are complied with.
Repairs or maintenance expenditure
Generally speaking, repairs and maintenance expenditure is deductible only to the extent it has been incurred during the income year. There can also be a fine line between a deductible repair/maintenance expense and capital expenditure, i.e. non-deductible. You may wish to consider accelerating repair/maintenance expenditure in order to bring forward the deduction, especially if you own a loss-making rental property which will be subject to the loss "ring fencing" rule (effective from 1 April 2019).
Sale of taxable land
Taxable income arising from the sale of land is generally derived on settlement. Although dependent on the terms of each contract, if the settlement date is extended beyond balance date (31 March), any sale would not need to be recognised for income tax until the following year.
Trading stock
Trading stock (excluding livestock) on hand at year end must be valued, subject to meeting the relevant criteria, using one of the prescribed methods: cost; discounted selling price; replacement price or market selling value if lower than cost. Generally, these methods must be applied consistently. Provisions for obsolete stock or stock write downs are not generally allowed as tax deductions. Therefore prior to year end it is important to perform a stock take and to ensure that all obsolete stock is physically disposed of or is valued using one of the prescribed methods. Concessional rules apply to small taxpayers (annual turnover of $3 million or less). A further concession is that a person with turnover of less than $1.3 million year can value their closing stock at the opening stock value, as long as the closing stock can be reasonably estimated to be worth less than $10,000. You will also need to take a record of transactions occurring after the stocktake and before the year end, and deduct these from the stocktake.
Vehicle expenses
If you have a vehicle which has not been used 100% for business purposes, have you kept a logbook? A logbook test period can be used to establish a business use percentage for tax, GST and FBT purposes. A new test period might be needed if there has been a significant change in business usage. However, sometimes a representative period may not even be possible, and a permanent logbook will need to be kept.