Year End Tax Planning Checklist
The end of the financial year is fast approaching. This is a good time to consider your year-end accounting and tax position. If you want to minimise your profit or tax or check that you have paid enough during the year, it is best to start thinking about it before 31 March.
Below is a checklist of items you should consider before 31 March, some of which may help you reduce the amount of tax you have to pay for 2017 and some of which may make the year-end accounts process faster.
- Review your fixed asset schedule to determine if any of the assets are no longer in use.
- Review your asset accounts to ensure that assets with a cost of under $500 are expensed.
- If you have sold any assets during the year, make sure that they are coded to an assets account and that GST has been recorded on the sale – often sales proceeds are coded to other revenue by mistake.
- Check that items in repairs & maintenance expenses do not include expenditure that improves an existing asset (eg replacing single glazed windows with double glazed) or significantly replaces an existing asset (eg a major upgrade of your website).
- If you are planning on significant repairs or maintenance soon, you may want to do the work before balance date so that you get a full deduction.
- If you have abandoned a software development project, then the full cost incurred to date can be written off.
- If you have replaced a company car during the year and there was a restricted use agreement in place, make sure that a new agreement is prepared for the new car.
- Buildings cannot generally be depreciated, but if you have purchased a new building during the year and have undertaken purchase price asset allocation exercise before balance date, you will be able to depreciate the chattels and non-fixed building items. You will also have to undergo a similar exercise in the year that an asset is sold.
- If you need to reduce your tax bill and are planning on spending the money anyway, you can get a full deduction for the following expense payments made in advance.
- Subscriptions to newspapers, journals, and other periodicals
- Postage and courier costs
- Road user charges
- Audit and accounting fees.
- You can also get a limited deduction for advance payments on the following items:
- Advertising prepaid by less than 6 months and under $12,000;
- Annual insurance premiums where the total insurance expense in the year does not exceed $12,000.
- Service or maintenance contracts prepaid by less than 3 months’ expenses, provided the total expense on the contract does not exceed $23,000 in the income year
- Subscriptions to trade or professional organisations for the year ahead, provided the total amount for that association in the year does not exceed $6,000.
- Telephone and other communications equipment costs can be prepaid by up to 12 months
- Travel and accommodation expenses prepaid by less than 6 months and under $12,000
- Rent for land and buildings prepaid by less than 6 months and under $23,000
- Other services prepaid by less than 6 months and under $12,000.
- If you have spent less than $10,000 in legal fees during the year then you can claim them in full. Otherwise, you may need to review the costs to determine if they are all deductible.
- Disability/loss of profits insurance premiums are deductible in full where the taxpayers are in business on their own account, or are employees. The downside of this is that any proceeds paid out under those policies is assessable.
- Equipment service contracts or warranties are fully deductible, provided it forms part of the purchase price of the assets.
- Holiday pay, bonuses and other employee entitlements owing at balance date are deductible, if paid within 63 days of the balance date.
- Generally, no deductions are allowed for a repairs and maintenance reserve, except for the maintenance obligations of a construction firm under its building contracts.
- As a general rule, provisions are not deductible, but there are a couple of exceptions:
- A deduction for a discount reserves (eg a prompt payment discount) where customers are customarily entitled to the discount and payment terms are less than 93 days should be allowed. The provision should be based on the number of customers who usually take advantage of the discount.
- A warranty provision is deductible in the year the goods are sold provided that a definite commitment can be established and the liability can be calculated. The calculation will generally require a few years of historical data to verify the expected value of the warranty claims liability.
- Amounts paid in consideration for the surrender or termination of a lease are taxable to the payee and deductible to the payer in the year they are derived or incurred.
- To be deductible, bad debts must be written off during the income year. Written off means that the debts have been written out of the debtor’s ledger, but you need not have exhausted all actions to collect the debt. A mere provision or reserve is not deductible.
- If you end up raising a credit note after balance date for goods or services that were supplied before balance date, you can recognise the credit in the year that goods or services were first supplied.
- Retentions on building projects are generally assessable in the year the contractor becomes legally entitled to receive them. If you have recorded the full sales value in your books, including the retentions, then you will be able to add back the value of retentions.
- Lease inducements are deductible to the landlord and assessable to the tenant over the term of the lease.
- If your turnover is $1.3M or less and a reasonable estimate of the true value of stock is under $10,000 then a physical stock count is not required and the opening stock value may be used.
- Physical stocktakes should be done (although if you do rolling stocktakes throughout the year, this will be sufficient) and the stocktake sheets retained. A couple of points on valuing stocks:
- Stocks should generally be valued at cost but replacement cost and discounted selling price may be used to approximate cost if these methods are also used for financial reporting purposes.
- Market selling value may only be used if it is less than cost and can be substantiated and is calculated on an item-by-item basis.
- There is no deduction of a stock obsolescence provision.
- Consumable aids used up in the production process can be excluded from the year end stock value provided that the total value is under $58,000 – that means an immediate write-off.
IRD and Tax Obligations
- If you have borrowed from friends, family or your trust and making interest payments during the year totalling $5,000 or more, RWT should be deducted from the gross interest and paid over to IRD.
- If you are wanting to record the payment of a dividend in your annual accounts, then you need to pay dividend withholding tax to IRD by the 20th of April. You might also wish to check that you have sufficient imputation tax credits available and make the company’s final 2017 provisional tax payment before 31 March if there are insufficient tax credits available.
- If you have drawn cash out of the business during the year and have now overdrawn your current account, then you will either have to charge interest or declare a salary or dividend to bring the account back into funds. This may mean that you should be paying RWT on the interest charged, or DWT on the dividend declared.
- If you transact with a related overseas-based party then you will need to comply with the transfer pricing rules. These require the transactions to be at an arm’s length position and appropriate documentation supporting the pricing should be maintained. Where taxpayers have prepared contemporaneous transfer pricing documentation, the onus of proof will generally shift to IRD.
- 31 March is final date for:
- Filing last years’ income tax return
- Applying for the ratio method for provisional tax for the year ahead
- Applying for LTC (look-through company) status for the year ahead if the company was incorporated in the 2015 tax year.
- Applying for a special tax code for the subsequent year – we have known some employers to revert to the non-disclosure tax rate where new STC certificates have expired.
- For new individual provisional taxpayers, making a provisional tax payment for the current year so you can apply for early payment discount.
- If you think your taxable income has dropped during the past year, you may wish to estimate the final provisional tax instalment (due 7 May 2017) down. Conversely, if you think your income has increased and you are subject to IRD’s interest charge you may wish to make a voluntary payment to minimise the interest.
- 7 April is the date for paying 2016 terminal tax and the final instalment of 2017 provisional tax is due on 7 May. If you expect to have difficulty funding the tax payments, give us a call and we can arrange tax finance through a tax pool agent.