Here are the top 13 tax considerations for business owners and financial directors. It is important to review and check each of these that are relevant to your company before the end of the tax year.
- Deemed dividends
Do any shareholders owe money to the business? This may create deemed dividend issues, creating interest penalties on the overdrawn shareholder’s account. These interest penalties result in unnecessary income, creating tax obligations.
Consider declaring a dividend before the end of March. Remember: Dividend withholding tax will be due on 20 April.
- Repairs and maintenance
If you are making expense claims for repairs and maintenance, make sure these fit the IRD guidelines. A good thing to remember going forward into the next tax year is to have your builder or contractor split your invoices into two – one for repairs and maintenance, and another for improvements. If you are a retail business, check the guidelines for store and building fit-outs.
- Accrued leave, holiday pay, commissions etc
A deduction for accrued employee remuneration can be claimed in the year it is incurred only if the remuneration is paid by the end of the 63rd day after the end of that income year. Employee remuneration covers all types of payments of employment income including salaries and wages, retirement leave, holiday pay and bonuses.
- Dealings across borders
If you are a local business with overseas interests, or a foreign-owned business in New Zealand, make sure you are…
- Formally documenting all offshore financing for the tax year to support the arm’s length principle
- Properly adhering to GST rules – overseas suppliers of remote services and digital products must register for and return GST when dealing with non-GST registered New Zealand clients, unless their income for the tax year is sub $60,000
- State of assets
Review your business assets at the end of financial year, and ensure the correct depreciation rates have been applied. It is best practice to have a formal review of your asset register regularly (every few years).
If you intend to write off assets and claim a deduction, make sure your asset meets the criteria. For example, assets may be written off and a deduction allowed if: the asset has been disposed of (destroyed, sold, stolen etc.); the value of the asset is less than $500 (as long as it is not part of another asset); or the asset was not purchased from the same supplier at the same time as another asset where the total was $500 or more.
- Mixed use assets
Don’t let the mixed asset rules trip you up. If your asset is found to be mixed-use, but you have claimed the full GST cost for the original asset purchase, you may be landed with a significant GST bill.
If your mixed use asset is owned by a company, make sure you’re well-versed in the additional rules around mixed use assets, such as record-keeping obligations, interest deduction effects, and asset ownership restructuring options.
You also need to remember that expenses relating to mixed use assets must be proportionately split into deductible and nondeductible. Visit the IRD page on mixed use assets to read more.
- Imputation credits
Imputation is a system that lets companies pass on to their shareholders the benefit of the New Zealand income tax they have already paid (to avoid ‘double taxation’).
Companies can do this by “imputing” credits for the income tax the company has already paid. That is, they attach tax credits to the dividends they pay out. The amount imputed is called an imputation credit. The credits are included in the total of the shareholder’s taxable income. A shareholder can claim the credits they have received to offset the tax they are liable to pay on that dividend income.
As we mentioned before, all dividends declared in March will incur dividend withholding tax due on 20 April. Penalties will apply you are in a debit position in your imputation account as at 31 March.
- Fringe benefit tax and motor vehicles
As an employer, if you make a vehicle available to an employee to use privately you’ll have to pay FBT.
If you provide motor vehicles to employees, you may not need to return FBT for a portion of the normal working week if…
- The employee is out of the country;
- The motor vehicle cannot be safely parked at the company premises;
- The employee is required to work from home;
- The employee operates out of the motor vehicle for work purposes.
- Research and Development loss tax credit
To “cash out” any tax losses from Research and Development (R&D) expenditure you must meet the eligibility criteria. To be eligible the company must:
- be a tax resident in New Zealand (and not treated as a resident of any other country under a Double Tax Agreement)
- have a net loss in the corresponding tax year
- have eligible R&D expenditure for the income year
- have sufficient R&D wage intensity
- meet the corporate eligibility criteria, and
- own (solely or jointly) the intellectual property and know-how that results from the R&D activity.
- Feasibility expenditure
In certain circumstances, businesses can deduct feasibility costs within the current year. According to the Trustpower case, the Supreme Court ruled that expenditure associated with early stage feasibility assessment, that is a normal incident of business, may be deductible, particularly where it is not directed toward a specific project.
The Supreme Court also found that if expenditure was incurred in the course of carrying on business for the purpose of deriving assessable income it may not be deductible, so if your business has large feasibility costs, get advice from a tax adviser.
- Obsolete stock
Stock that has lost value is taking up valuable space and can have an impact on the taxable profit of any business. If you take a stock take before EOFY and decide to dispose of or sell obsolete or damaged stock, keep records to show how you dispose of or discount leftover physical stock.
- Writing off unpaid debts
Consider writing off old debts that are unlikely to get paid (but remember, you need to show documentation of all the steps taken to recover the debt). At least this makes the debts tax deductible. If you are writing off debts, make sure this is done by 31 March. There are a few rules around this, so be sure to read up on them.
- Loss offsets
For group companies, make sure you correctly process any tax loss offsets in your tax return. Additionally, all subvention payments need to be recorded for accounting purposes.
Phew, that’s a lot of work!
If you need help reviewing these top 13 areas, contact us and we’ll arrange a time to sit down with you and focus on making EOFY as smooth as possible.