tax tips to think about before 31 March
It is almost the end of the financial year for most tax payers. Below is some tax tips to think about before 31 March comes around.
Write Off Bad Debts
Businesses with outstanding amounts owed, that are unlikely to be recovered in full should consider writing these off as bad debts. Bad debts can be used as a tax deduction , effectively reducing your taxable income for the relevant year if it has been documented that they are to be written off or if they have been dealt with in your computer system prior to year end.
A stocktake is required unless your stock is less than $10,000 and your turnover is less than $1.3m. Stock valuations are subject to detailed rules.
1.Standard valuation methods
1) Cost: Any taxpayer can value their trading stock at the end of an income year at cost. They can use any reasonable methods as long as the figure representing the reality cost.
According to NZ International Accounting Standards, the cost of inventories includes all costs incurred in bringing the inventories to their present location and condition. They include import duties and other purchase taxes (do not include GST because it will be recovered subsequently); transport and handing costs (should be clearly related to inventories, otherwise it is a consumable aid); any other directly attributable costs of acquisition of finished goods, materials and services. Moreover, deductions and deferred discounts decrease the cost of inventories when received.
2) Replacement price (If used in the taxpayer’s financial statements)
Replacement price is the last available market value for acquiring the equivalent trading stock on the income year.
3) Discounted selling price
Discounted selling price is the retail selling price minus the normal gross profit margin. ‘Normal gross profit margin’ must be calculated annually for each department or category of goods.
4) Market selling value (If lower than cost and the taxpayer has reasonable evidence to substantiate it):
Market selling value is the amount expected to be received in the ordinary course of business from the sale of the trading stock, less: the estimated costs of completion and the expected cost of selling the trading stock.
Work In Progress
It is recommended that on 31 March you asses all the jobs in progress. Make a list of these jobs and add up the costs associated with these jobs (exclusive of GST). The costs will include any stock items used and employee/contractor time on these jobs.
These costs are treated as closing Work In Progress as at 31 March and are costs yet to be billed to the customers. These won’t be deductible as an expense at the end of the financial year.
Fixed Asset Schedule
We suggest reviewing your fixed asset schedule and assess whether any assets are no longer in use by the business, not working, stolen, or disposed of during the year. By writing off these assets (only if they meet the write off criteria) a deduction will be allowed with respect to those assets.
Bonuses and Holiday Pay
It is possible to claim amounts payable to your employees as a deduction for the current financial year, so long as the full amount is paid to the employee within 63 days of the balance date. Amounts that are paid more than 63 days from the balance date can only be claimed in the following financial year.
By pre-paying for tax-deductible expenses before 31 March, you will be able to minimise you tax bill. Some categories of business expenses can be pre-paid without any limitations, meaning that you can claim as much as you like. Examples include stationery, vehicle registration, accounting and auditing fees, and postal charges. Most other expense categories have caps that limit the amount that can be claimed in a year.
|Stationery||No limit||No limit|
|Subscriptions to newspapers, journals & other periodicals||No limit||No limit|
|Postage and courier costs||No limit||No limit|
|Rate||No limit||No limit|
|Road user charges||No limit||No limit|
|Audit and accounting fees||No limit||No limit|
|Consumable aids||No limit||58,000|
|Prepaid insurance premiums (where the total annual premium is less than $12,000)||12||No limit|
|Lease or bailment of livestock||6||23,000|
|Rent for land and buildings||6||26,000|
|Service or maintenance contracts (total annual cost less than $23,000)||3||No limit|
|Subscriptions for trade professional associations (total annual subscription less than $6,000)||12||No limit|
|Telephone and other communication equipment||2||No limit|
|Travel and accommodation expenses||6||14,000|
In addition to the above there is also the Covid-19 tax relief measures to consider
There are some things you may not be used to thinking about when you prep for end of tax year:
- New rules to keep cash flowing – If money is a bit tight as the financial year draws to a close, here are four tax measures focused on providing and enabling cashflow that you might like to consider:
- The tax loss carry-back rule, which means if you’re expecting a tax loss for the year ended 31 March 2021, you might be eligible for a refund of provisional tax previously paid for the 2020 year.
- If your cashflow has been significantly impacted by the economic effects of COVID-19, you may be able to apply for relief from use of money interest and penalties, or enter into an instalment arrangement for payments due to Inland Revenue. Inland Revenue’s ability to remit use of money interest in such circumstances applies to tax payments due up until 25 March 2022.
- Keeping an eye on tax losses, as the Government have announced plans to introduce a same or similar business test that allows tax losses to be carried forward. This will become useful if you’re wanting to raise capital for your business in the future.
- Consider the Small Business Cashflow (Loan) Scheme being offered by the Government through Inland Revenue where certain conditions are met. This provides loans of up to $10,000 (dependent on the number of employees) with an interest rate of 3%, with no interest applying if the loan is repaid within 2 years.
- Asset threshold lowering – Put aside time to review your asset expenditure. Identify any assets (valued up to $5,000) that you need and buy them before 17 March 2021. This way, you’ll be able to claim an immediate deduction for these assets under the low-value asset write-off as the threshold drops from $5,000 to $1,000 on 17 March 2021. The temporary $5,000 threshold was a concession as a result of the COVID-19 relief measures introduced, and from the 17 March 2021 the $1,000 threshold is an increase from the $500 amount that was previously in place prior to 2020. It’s also a good time to ensure records are up to date on any commercial buildings as depreciation for tax purposes is available on commercial buildings for the year ended 31 March 2021.
- Earn over $180,000 a year? – If you’re one of the 75,000 Kiwis impacted by the new 39% tax rate, review your business and investment structure with us before 1 April 2021. The marginal tax change, rushed through last December to help pay for the COVID-19 recovery, applies to all employment income over $180,000 a year. It includes extra pay earned in the course of employment, such as bonuses, back pay, redundancy, and retirement payments. It is timely to consider such payments in relation to the 2021 year, as well as reviewing dividend payments.
- Keeping subsidy records crucial – While COVID-19 related wage and leave subsidies are non-taxable, keep accurate records of any subsidy you received and which staff member it was paid to, in case the Ministry of Social Development asks to review your records down the track.
- R&D loss tax credit – Start-up companies are able to cash-out their tax losses arising from eligible research and development (R&D) expenditure, and avoid carrying the losses through to the next income year. The credit can only be for:
- eligible R&D business expenditure
- up to 28% of your tax losses from R&D activity
- companies that are tax residents in New Zealand
- dates on or after 1 April 2015. The rules around R&D expenditure are detailed and eligible R&D expenditure will require approval from Inland Revenue. So if you’re looking to claim under these rules, you will need to start looking at this sooner rather than later, and keeping records of such expenditure as it occurs.
- Staff reimbursements and allowances – Make sure you have a good record of any reimbursements and allowances paid to employees for expenditures – generally and in account of new COVID-19 related Working from Home (WFM) tax changes. Remember:
- For telecommunications devices and plans, staff reimbursements are tax exempt up to $5 per week. If reimbursement is above this amount, the exempt amount is 25% if the device or plan is used partly, 75% if used mainly, or 100% if used exclusively for employment purposes.
- WFH payments claimed between 17 March and 17 September 2021 allow an additional $15 per week, per employee, to be exempt income for other WFH expenditure.
- A tax-exempt payment for use of furniture or equipment when WFH to reimburse the depreciation of the item. The payment will typically be for the cost of the asset and the payment will still be deductible to the employer. Note the low-value asset threshold of $5,000 applying between 17 March 2020 to 17 March 2021 will apply here.
Documents required to prepare financial statements after year end
- Closing bank statements to verify the closing balances
- Loan statements for interest & principal payments
- Hire Purchase agreements
- List of people who owe you money (unless in computerised system)
- List of people you owe money to (unless in computerised system)
- Stock take
- Vehicle log books
- Interest & Dividend received documentation
We will send out our annual questionnaire/checklists which will detail everything else we need when we are ready for you to bring your information into the office.