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Tax Residency

Year End Tax Planning

Year End Tax Planning

31 March is the tax year end for most of us. Here are a few things you can do by 31 March to save cut your tax bill.

Write off Bad Debts

If you have overdue debtors that you will probably never recover, you can claim a bad debt deduction for them. To claim them in this tax year you need to write them off by 31 March. The requirements are:

Proof that they are bad debts – i.e., evidence that you have chased the money
Physically write them off by 31 March – by putting through a credit note in your accounting system or recording that they are bad debts.
If the debtor does subsequently pay in the next tax year, that will be treated as taxable income.

Claim Business Mileage

If you use your personal vehicle for business, you can claim the business use. One of the simplest methods is to calculate your business kilometres for the year and claim the IRD kilometre rate (currently 73 cents/km). Fill out a logbook to calculate your business kilometres.

You can claim the kilometre rate for up to 5,000 business km’s per year. If you want to claim more than 5,000km’s, you will have to use actual vehicle costs.

Calculate Fringe Benefit Tax Exempt Days

If you are paying Fringe Benefit Tax (FBT) for a company vehicle, you do not have to pay FBT for days when the vehicle is not available for private use. Add up those days to reduce your FBT cost. Exempt days include days when the vehicle is:

  • At an airport car park while the employee is away on business
  • Out of action including being at the garage or panel beaters
  • Stored at the employer’s premises so unavailable for the employee to use
  • Used for an emergency call-out
  • Out of town on business travel for 24 hours or more

Write Off Redundant Fixed Assets

Fixed asset that have been scrapped or are no longer useable can be written off and the remaining book value claimed as a loss on disposal. Review your fixed asset schedule from last year’s accounts for any such assets.

Write off Obsolete Stock

Obsolete stock must be physically removed by 31 March to avoid including it in your closing stock value. Also, stock can be valued at cost or, if lower, resale value. If the cost of selling stock is higher than the price you will get for it, it can be valued at nil.

Register for Ratio Method or Accounting Income Method (AIM) for Provisional Tax

Under the default method, your provisional tax is based on your previous year’s tax. There are two other methods available that base your provisional tax on your results during the year, increasing your provisional tax when you make more money and decreasing it when you make less. This helps you match tax payments with your cash flow.

The ratio method calculates provisional tax as a percentage of the sales in each GST return. The new Accounting Income Method (AIM), starting from 1 April 2018, calculates provisional tax based on the profit in your management accounts.

To use either of these methods for the tax year starting 1 April 2018, you need to make an election by 31 March 2018. If you think they may be helpful, give us a call to discuss.

Note, these methods are only available for the business. You cannot use them for your personal provisional tax if you are a shareholder employee as you do not have GST returns or management accounts to base them on.

Register Look-through Companies (LTCs)

Look through companies are treated like partnerships for income tax purposes with profits and losses flowing through to the shareholders’ individual tax returns. If you have a company making losses, an LTC allows you to offset the losses against your personal income rather than being trapped in the company.

To become a LTC for the next tax year, an election needs to be made by 31 March.

Consider Paying Dividends

If you have retained profits in your company, at some stage you will want to pay them out to shareholders. If your personal income is likely to rise in future years, there may be a tax advantage in paying a dividend this year to be taxed at a lower marginal tax rate.

Pay Expenses by 31 March

Some expenses can be claimed if paid by 31 March even if they relate to the following year. Examples include:

  • Stationery, postage and courier costs
  • Subscriptions
  • Rates
  • Road user charges
  • Advertising up to $14,000 and used within six months following 31 March
  • Employee payments such as holiday pay and bonuses that are used within 63 days after 31 March
  • Insurance premiums up to $12,000 covering the following year

New Company Car Rules

New Company Car Rules

A new Option for Claiming Company Car Expenses

Small business owners typically have one vehicle which they use for both business and personal use. A common question is whether their company should own their vehicle.

Until recently, company ownership of your car meant the company claiming 100% of the vehicle costs but paying Fringe Benefit Tax (FBT) on the private usage. The problem is that the FBT rules assume the shareholder-employee has full use of a private vehicle (with some limited exceptions) and FBT is charged accordingly. The FBT paid sometimes exceeds the tax savings from claiming the vehicle expenses.

From 1 April 2017, we have a new option. A company can prevent paying FBT by claiming only the business portion of the company car expenses. The company needs to establish the business proportion by keeping records, which can be through a logbook kept for three months to establish an average use. This has always been the default method for sole-traders and partnerships.

Which choice is best

The most tax-effective choice depends on the amount of business travel versus private travel. A company car used predominantly for private use, may be better off paying FBT. FBT is the same regardless of the private kilometres used and all vehicle costs can be claimed regardless of how few business kilometres are travelled.

The new option of claiming only the business-related costs with no FBT issues is advantageous when the travel is predominantly for business. The portion of expenses denied for private travel will be small and no FBT payable.

There are various options for dealing with vehicles that are used for both private and business purposes including keeping it out of the business and reimbursing the owner or business use. Your best option will depend on your individual circumstances so, if in doubt, get some advice.

Contact us with your business questions.

Avoid the New Business Tax Trap

Avoid the New Business Tax Trap

Whether we like it or not, a lot of our money goes on tax. With up to 33% of our profits going to income tax alone, tax has a major impact on our business’s cash flow. But when we start a new business, it can be up to two years before we need pay a cent, making it too easy to put our head in the sand.

It does catch up with us. Facing two years of tax, payable within a month, can be enough to knock a fledgling business over. This is one bill that a new business owner must have a plan for.

The start-up

Take Sally, an Interior Design Consultant. She starts some private work in April 2016 hoping it might lead to a fulltime business. After a couple of successful projects, referrals start coming in from a busy boutique architectural firm. By January 2017 she is flat out. Money is coming in but also pouring out.

The busier she gets, the more she spends to save time – a house cleaner, child-care and eating out several times a week.

Sally also worries that her personal image isn’t compatible with her profession. Rolling up to a new prospective client’s home in her trusty 14-year-old station wagon wearing an old sweatshirt isn’t inspiring confidence in her as a style expert. So, she starts regularly upgrading her wardrobe. She also trades the station wagon for a respectable four-year-old SUV.

Sally’s second year in business gets even busier. She knows something must give and plans to hire some administration help, if only she had time to advertise and interview. Other than visiting an accountant when she first started up, who tried to explain her tax requirements and registered her for GST, she has done everything herself.

By February 2019, Sally knows she needs to sort her accounts out. She puts aside a day, collates her financial records and visits the accountant who helped her at the start. It is a relief to finally hand a job over, but she isn’t prepared for what is coming.

On the 20th March, her accountant emails her financial statements and a tax return showing a $75,000 profit in the tax year ended 31 March 2017. She finds it hard to believe as there sure isn’t $75,000 in her bank.

He also tells Sally she has $15,670 income tax payable for that year, due in 18 days. Right now, Sally isn’t feeling too good. She knew she should have been putting money aside for tax, but always needed things for the business.

To top it off, the “Provisional Tax” that the accountant had warned Sally about at that initial meeting has also reared its ugly head. Sally has $16,454 of provisional tax, for the year to 31 March 2018, due by 7 May.

That is over $32,000 of tax due in the next seven weeks.

How did it get to this stage?

By 7 May 2019, when the $16,454 provisional tax is due, Sally has been working for just over two years. Her tax payments on 7 April and 7 May 2018 are the tax liabilities on two years’ profits.

When starting a business, it is easy to ignore a bill that you won’t see for up to two years, especially when there are more pressing, and more interesting, things to focus on. But as soon as you are making money your debt to IRD is accumulating.

How to plan for tax payments

Every business should have a financial plan, including a cash flow forecast, to plan for major financial commitments including purchasing equipment and paying tax. The plan will show you what percentage of your income received needs to be put aside for commitments such as income tax, GST and ACC levies. Once you have these commitments clearly scheduled into your plan, it is easy to find the discipline to put the money aside. Not so when they are a big unknown on the horizon.

It is well worth a modest investment at the start of your business journey to get professional help with your financial plan and take control of your business commitments before they take control of you.

Contact us with your business questions.

Entertainment Tax Explained

Entertainment Tax Explained

As a professional or consultant, your business success relies on developing and nurturing relationships. So choosing to pay for a client’s lunch, or shouting a Christmas dinner for staff and associates, is part of doing business.

I am guessing, however, that your invitations do not normally extend to the person you’ve dealt with at IRD. Whether or not that is the reason, the taxman hasn’t quite come to the party.

The general rule, for income tax purposes, is that expenses incurred in deriving income or running your business are fully deductible. I.e., we deduct the full expense from our income when calculating our taxable profit. However, the Income Tax Act limits the deduction of certain entertainment expenditure to 50% of the cost. The rationale behind the law is that these expenses provide a significant private benefit in addition to any business benefit.

So what expenses are limited and what can we claim in full?

50% Deductible Expenditure

The Income Tax Act limits the tax deduction to 50% of spending on:

  • Corporate boxes, marquees etc at entertainment events and food and drink provided there
  • Holiday accommodation or pleasure craft
  • Food and drink provided away from your business premises, or at your premises if you’re having a social function

If you reimburse an employee for expenditure on these items, while the reimbursement may be a tax-free allowance to the employee, the cost will remain 50% deductible to the business.

Fortunately, not all expenditure on food and drink is subject to the 50% limitation.

Fully Deductible Expenditure

You can claim 100% of:

  • Meals and accommodation when travelling for the principal purpose of business, unless you are also entertaining a business contact or attending a function
  • Light refreshments provided at work including tea and coffee
  • Light refreshments at a conference or professional development workshop
  • Light refreshments that are incidental to a function, conference or seminar put on to promote your business
  • A meal at a conference where the professional development or learning time exceeds four hours
  • Meals for staff working overtime
  • Food and drink when overseas on business

Consider These Examples

  • A business consultant puts on a seminar after work for existing and prospective clients to promote the value of business planning for professionals. Drinks and nibbles provided are incidental to the primary purpose of the seminar and are therefore fully deductible.
  • An Auckland architect travels to Wellington to discuss an upcoming project with a client. After their meeting, the architect takes the client to dinner. If the architect pays for both meals, it is entertainment and therefore 50% deductible. If the architect just pays for their own meal, it is fully deductible as a travel cost.
  • The three partners of an Auckland IT Consultancy go to Fiji for an annual planning retreat. As food and drink overseas is not subject to the entertainment limitation, all expenses are fully deductible. However, if part of the expenditure is purely entertainment, this will be subject to Fringe Benefit Tax.

When Does the Expenditure Become a Fringe Benefit?

Entertainment, as above, refers to a business entertaining its staff or business contacts. If benefits are provided to employees, including shareholder-employees, which the employees can enjoy at their discretion, or it is provided overseas, it is no longer entertainment expenditure but becomes a fringe benefit.

For example, you buy your employee a restaurant voucher to use if or when they choose. This is a fringe benefit.

While Fringe Benefit Tax is a whole other area, basically, the business can claim the full cost of providing fringe benefits, but has to pay Fringe Benefit Tax on the value of the benefits.

What About Gifts?

If you give your staff cash, it will generally be considered part of their remuneration and subject to PAYE. Non-cash gifts to staff however are considered fringe benefits. As above, these are fully deductible to the business but subject to Fringe Benefit Tax.

The good news is that non-cash gifts of up to $300 per quarter (or $1,200 per year) per employee are generally exempt from Fringe Benefit Tax. Note however that if you exceed this threshold, the whole benefit is subject to Fringe Benefit Tax.

As the Fringe Benefit Tax rules apply to employer-employee relationships, gifts to clients and other business contacts are treated differently. They are generally fully deductible; however, gifts of food and drink to business contacts are subject to the 50% entertainment tax limitation. Keep this in mind when buying those Christmas hampers.

In Conclusion

The business of professionals and consultants is built on relationships, so you may choose to spend some money showing your appreciation of those relationships. But before you splash out, make sure you understand the tax implications and manage your options accordingly.

Robb MacKinlay is an accountant and business advisor to professionals and consultants, helping them convert their expertise into profitable business.

Contact us with your business questions.