Leading into the new tax year, now is the ideal time to consider tax issues and, where available, plan opportunities. These points are very similar to last year but we note there are a number of changes which will affect future periods. Those changes are not yet law and we will provide updates as soon as these changes take effect. Key matters are outlined below.
Accounting & taxation services fee accrual
Following the decision in TRA Case Y17, the accounting and taxation services fees accrual for the current year should be added back in the taxation calculation. This adjustment will reverse in the subsequent year’s taxation calculation when the deduction is taken.
To claim a tax deduction, the debt must be:
- Bad; and
- Physically written off on or before balance date.
The above rules mean that you must be able to support that the debt is bad (i.e. you have made reasonable efforts to collect the debt before writing it off).
Companies - shareholding continuity & commonality
The ability to carry forward tax losses is subject to shareholding continuity of 49%. The ability to offset losses against the net income of other group companies requires common shareholding of 66%. The ability to carry forward imputation credits is subject to shareholding continuity of 66%.
Note that these tests must be met at all times and not just at year end.
If you are anticipating shareholding changes and believe you will breach continuity, forfeited losses can be minimised by accelerating income recognition and minimising deductions where possible. Also, consider the payment of a dividend or making a taxable bonus issue to use imputation credits before they are forfeited.
Controlled foreign companies (CFCS)
With the exception of most Australian shareholdings, ownership of foreign shares has the potential for New Zealand tax to be payable, primarily if the foreign company derives passive income (including, but not limited to, interest, some dividends and royalties).
If you have an investment in a CFC then please contact us for further advice
In summary, employer provided accommodation or accommodation payments will generally be exempt where the employee is temporarily working away from home for a period of up to two years (or three years in the case of capital projects). Employee meal costs or meal allowances will generally be exempt where the employee is working away from home for a period of up to three months.
The subtleties in these rules present both opportunities and pitfalls to employers. Therefore, we recommend that you contact us if you are considering providing accommodation or paying a meal allowance to your employees.
Accrued employee remuneration (e.g. bonuses, holiday pay and long service leave) must be paid out within 63 days of balance date to be tax deductible in the current year.
We note that accrued bonuses paid out within 63 days of balance date may not be tax deductible if there is no evidence that a commitment was made to pay the bonus on or before balance date.
Redundancy payments must be paid by year end for the employer to be able to claim a deduction. That is, the 63 day rule does not apply.
A GST adjustment for non-deductible entertainment must be included as an output tax adjustment in the GST return which covers the earlier of the date the return of income is filed or date the return of income is due. This expense must be added back for income tax purposes.
There is an opportunity available whereby it may not be necessary to make the GST output adjustment. Please contact us if you are interested in finding out more about this.
Review the fixed asset register to ensure the assets exist and to identify assets that are no longer used in order to claim a deduction for the remaining adjusted tax value of the asset.
Assets can be written off if they are no longer used but have not been disposed of, provided:
- The asset is no longer used by you in your business or to produce income and;
- Neither you nor an associated person intends to use the asset in a business or in the future to derive gross income; and
- The cost of disposing of the asset would be more than any proceeds from disposing of the asset; and
- The asset is neither a building nor an asset being depreciated using the pooling method.
Assets costing $500 or less qualify for an immediate write-off provided:
- They do not form part of some other asset; and
They are not purchased from the same supplier at the same time as another asset and the total is more than $500.
Foreign investment funds (FIFS)
There are a number of available methods to calculate the tax position of interests held in FIFs (for instance, shares held in overseas companies, with the exception of some Australian shares). Where a FIF has been held, a change in calculation method may be desirable to improve your tax position. In some cases, it may be necessary to make an election before year end to be able to use the best method.
If you have a substantial stake in a FIF then please contact us for further advice.
Foreign superannuation schemes
Generally, lump sum distributions from Foreign Superannuation Schemes are included as taxable income using either the schedule or formula methods. Typically, the longer that a taxpayer has been in New Zealand, the higher the amount of the lump sum distribution that will be taxable income.
Payments of regular amounts from non-state foreign superannuation are usually subject to tax.
We recommend that you contact us for further advice as individual circumstances do vary.
Fringe benefit tax
The end of the year is a good time to review any fringe benefits that might be provided to employees that might not have been identified.
The fourth quarter Fringe Benefit Tax return is different to the other Fringe Benefit Tax returns during the year. An alternate rate calculation is either compulsory (for those who used the 43% alternate rate during the year) or is optional (for those who used the 49.25% single rate). If all employees to whom fringe benefits are provided are on the highest income tax bracket, and this option is available, it may be beneficial to continue using the 49.25% single rate.
We can assist in the preparation of Fringe Benefit Tax returns if required.
Goods and services tax
As part of your year end procedures, a reconciliation between the entity GST return and the balance of the GST account in its financial statements should be undertaken. This reconciliation can provide a useful warning about any discrepancies and provide an opportunity to rectify any issues. Also, this reconciliation is generally requested by Inland Revenue as part of their audit procedures.
If there are unreconciled differences we recommend a GST review be performed to identify possible system issues.
Imputation credit account (ICA)
Your company’s imputation year is from 1 April 2016 to 31 March 2017. Please ensure that the ICA is not in debit at 31 March 2017. A debit ICA will attract a penalty of 10%.
We recommend a review of inter-company charges be conducted to ensure documentation is in place to support any deductions and also to minimise any potential tax risk.
Mixed use assets
The tax treatment of real estate (mainly holiday homes), water craft (with a purchase price of more than $50,000) and aircraft (with a purchase price of more than $50,000) where the asset is used for both private use and income earning use and is unused for 62 days or more per year is subject to the mixed use asset rules. Under the rules, certain losses will be quarantined and a deduction may only be claimed when the asset derives positive net income.
If the gross income from the mixed-use asset is less than $4,000 per annum, or if you would otherwise have quarantined deductions, the ability exists to opt out from the mixed use asset regime for that year. This means that income is not subject to tax, but also means that no deductions can be claimed. This concession does not apply to close companies.
Complex interest deductibility rules exist in instances where mixed use assets are held in companies, as well as additional quarantining rules.
If you own mixed use assets, we recommend contacting us to discuss your options.
Payments to non-resident contractors
If payments have been made to non-residents for services performed in New Zealand the non-resident withholding payment rules may apply. There are exemptions available in specific circumstances. Please contact us if you require further information.
Certain prepayments can be claimed as a tax deduction provided they are expensed for financial reporting purposes. Please contact us if you would like further details.
Provisions for warranties & other expenses
These accounting provisions are generally non-deductible. However, in accordance with the Privy Council decision in Mitsubishi Motors, it is possible to obtain deductions for provisions in limited circumstances, if appropriate records are held.
Recognition of income
The income recognition rules for tax purposes are complex and opportunities may be available to defer recognition to the subsequent year. Of particular interest are contracts and agreements which span balance date.
RWT on dividends
The RWT rate on dividends remains at 33%. This means that any dividends with imputation credits attached at 28% will require a deduction of 5% RWT. This RWT is payable by the 20th of the month following the date of the dividend.
In light of the Penny & Hooper decision, it is important to ensure that in closely held businesses, commercially realistic salaries are paid to any shareholder-employees. Please contact us if you need further help in this area.
Thin Capitalization regime
The regime will apply if a New Zealand company is owned or controlled by non-residents or where a New Zealand owned company owns foreign controlled companies. We suggest that you confirm whether or not your company is subject to the regime and if so, whether its debt level exceeds the applicable safe harbour level.
For foreign controlled companies, the safe harbour is if interest bearing debt does not exceed 60% of the value of assets. It may be possible to undertake financial restructuring prior to balance date to maximise interest deductions.
Various valuation options are available to you depending on annual turnover and the valuation method used for financial reporting purposes.
In general terms, trading stock, including work in progress, is valued at either cost using a cost valuation method or market selling value when this is lower than cost.
The cost valuation methods include cost, or where permitted, replacement price, or discounted selling price.
To claim a deduction for obsolete or slow moving stock, it should be physically disposed of on or before 31 March 2017 or valued at market selling value if lower than cost.
With the increase in transfer pricing audit activity, we suggest that any dealings with offshore related parties be formally documented to support the arm’s length nature of the prices applied.
If documentation has not been prepared in support of your transfer prices and Inland Revenue is not in agreement with the prices adopted, Inland Revenue will impose a minimum penalty of 20% on any shortfall and the onus is on you, instead of on Inland Revenue, to demonstrate that the prices adopted are correct.
For trusts on a tax agents list, with an extension of time for filing, the distribution date may be the earlier of the date on which the trust income tax return is filed or the date by which the trust tax return is due to be filed.
If the Trust Deed contains a clause requiring the distributions to be made within 6 months of balance date, this can override the above.
Withholding Tax on interest
If an interest expense on intercompany loans is booked via a journal entry then this triggers an obligation to pay resident withholding tax (RWT) or non-resident withholding tax (NRWT) to Inland Revenue by the 20th of the month following the date of the journal entry.
With massive changes from 1 April 2017, particularly in the area of provisional tax and schedular withholding, now is a good time to consider the impact that these changes will have on your business and whether or not changes need to be made to your systems to accommodate. Your Baker Tilly Staples Rodway advisor can guide you through these changes and ensure that opportunities presented are utilised.
The above checklist is of a general nature only and does not take into account any specific needs or circumstances. We would be pleased to provide further information on any of the issues highlighted in the checklist