Year-end housekeeping tips
With the end of the tax year fast approaching for most taxpayers, there are a number of steps that you can take prior to balance date to help you maximise any tax opportunities that you're entitled to.
The list below identifies some of these steps 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.
Bright-line test for residential properties
This rule can tax certain residential land which is sold within 5 or 10 years of acquisition date (depending on the date of acquisition), irrespective of the purpose or intention at the time the property was acquired. Some exemptions are available.
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 $5000 (between 17 March 2020 and 16 March 2021) and $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.
Fixed assets – Commercial Properties
The rate of depreciation on buildings for tax purposes is 2% DV and 1.5% SL (effective from the 2021 income year)
To maximise depreciation deductions it is important to separately identify, where possible, commercial fit-out (depreciation deductions can be claimed) from the building proper.
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. Please note that there were some significant changes made to the withholding payment rules, effective from 1 April 2017.
Prepaid expenditure
Certain types of expenditure can be claimed as a tax deduction in the year in which they are incurred regardless of the fact that the good or service will not be used until a future year, but only if they have also been expensed for financial reporting purposes. Some of these prepayment concessions have a dollar limit and/or a limit on the length of the period after year end.
The following prepaid expenses could be claimed in the 2021 income year:
Advertising for up to 6 months after the balance date and not exceeding $14,000 in total
Insurance for up to 12 months after the balance date as long as the premiums incurred during the year for the contract do not exceed $12,000
Rates to the extent of the amount invoiced on or before balance date
Rent for up to 6 months after the balance date and not exceeding $26,000 in total. There is no monetary limit for rent that is prepaid not more than one month in advance
Subscriptions or fees for membership in any trade or professional association, for up to 12 months after the balance date
Advance bookings for travel and accommodation, to be used within 6 months after balance date and not exceeding $14,000 in total
Service or maintenance contract for plant, equipment or machinery, for up to 3 months after balance date, as long as the expenditure incurred during the year for the contract does not exceed $23,000
Use or maintenance of telephone and other communication equipment for up to 2 months after balance date (amount is unlimited)
Consumable aids, i.e. items that do not become a component of the finished stock, e.g. oil, grinding wheels, chemicals, wrapping and packaging, not exceeding $58,000 in total
Audit fees and mandatory accounting fees (unlimited)
Stationery, subscriptions for newspapers, journals or other periodicals, and postal and courier services (unlimited)
Vehicle registration fees, drivers license fees and road user charges (unlimited)
Other services for up to 6 months after balance date, and not exceeding $14,000 in total
Other periodic charges for up to 12 months after balance date, and not exceeding $14,000 in total
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.