Are you ready for tax year-end?
Tax Alert - March 2018
By Emma Faulknor & Susan Wynne
As 31 March (being the standard balance date in New Zealand) creeps up on us for another year, it is important to consider the tax matters that should be tidied up before then as well as upcoming tax matters to be aware of.
What needs to be done before year end?
Despite the rush of year-end approaching there are some tax matters that should be considered before year-end that could impact on the amount of tax payable:
- Bad debts are deductible in the year they are written off. As such, they need to be written off in the ledger before balance date.
- Imputation credit accounts should be reviewed to ensure this account is not in debit at 31 March. Irrespective of your tax income year, the imputation credit account has a 31 March balance date and must have a nil or credit balance to prevent further income tax or penalties from being applied.
- Ensure that any loss offsets and/or subvention payments in relation to the prior income year have been made and appropriate notice provided to Inland Revenue by 31 March.
- If you are owned by non-residents and are subject to the thin capitalisation rules, you should be checking your debt levels before year end. Thin capitalisation rules help protect the New Zealand tax base from artificially high gearing and resulting interest deductions. Where debt is too high compared with equity, a taxpayer may be required to make an adjustment to include an amount of income relating to the interest portion considered too high.
If you are close to the thin capitalisation threshold in the lead up to 31 March it may be worth reviewing debt levels and consulting with your Deloitte adviser to tidy this up before year end if possible. A possible solution for excess group debt may include remitting debt. The changes to the debt remission rules were finalised in March last year and were backdated to apply from the 2007 income year. The effect was to ensure that no debt remission income would arise when debt was forgiven within the same economic group. It is important to note that deemed payment of interest may arise and corresponding income may need to be recognised. More details on the changes were discussed in a previous Tax Alert article (The new related party debt remission rules).
A number of changes to thin capitalisation are proposed as part of the BEPS proposals, including a new “restricted transfer pricing” approach to pricing inbound related party loans and a carve out from the thin capitalisation rules for certain taxpayers who take less than $1 million in interest deductions annually. These new rules are generally expected to apply to income years beginning on or after 1 July 2018.
Recent provisional tax updates
Some provisional tax payments may have already been made for the 2018 income year. This is the first year the new use of money interest rules apply, providing concessions to taxpayers who pay their provisional tax on time and use an approved calculation method at the first and second instalments. As the third instalment for March balance dates is due on 7 May 2018, now is a good time to review your income tax position for the 2018 income year and pay your third instalment accordingly. For those that have taken advantage of the new use of money interest rules, having an accurate picture of your 2018 year prior to the third instalment will help minimise exposure to interest. We have published a more detailed Tax Alert article on the changes (New use of money interest rules for provisional taxpayers). Given this is the first year the rules have applied, it may be worth consulting with your Deloitte tax advisor prior to paying your third instalment.
A new method for calculating provisional tax known as the Accounting Income Method (AIM) will be available for taxpayers to use from 1 April 2018. Under this method, taxpayers will be able to elect to pay two monthly instalments based on automatically adjusted income determined by their accounting software (see Is AIM the right provisional tax method for you?). The method is designed with small businesses in mind, however there may be some practical issues in setting up the underlying information. Further, there may be little benefit in using AIM when a taxpayer is experiencing increasing profits. Instead, the taxpayer could take advantage of the new use of money interest rules by applying the standard uplift method to obtain lower provisional tax obligations at the first and second instalments.
Is that income taxable?
As part of determining taxable income, we want to confirm if the revenue recognised in the accounting records should also be included for tax purposes. Revenue should be recognised when it has been ‘derived’. The tax treatment of any unusual or one-off receipts or new sources of income should be reviewed. Intercompany dividends, capital gains and revaluations to fixed assets are examples of irregular receipts that may not result in taxable income for a taxpayer.
Timing adjustments should also be considered. Progress payments on long term contracts and rebates are common examples of receipts that may not have been derived for tax purposes but may have a different accounting treatment.
What can I deduct?
The general rule is that expenditure is deductible when it is ‘incurred’. As with the treatment of taxable income, this may give rise to timing adjustments. The expenditure you may want to consider immediately after 31 March includes:
- Bonuses, holiday pay, long service leave or other employment provisions accrued at balance date are deductible to the extent there is a liability to pay these at year end and they have been paid out within 63 days of balance date. From the 2018 year there will also be the option to add back the provision in full without adjusting for 63 day amounts.
- Repairs and maintenance, legal and consulting fees should be reviewed for any capital amounts. It’s helpful to review these accounts soon after 31 March, while the work is still fresh in everyone’s memory. These accounts may also contain feasibility expenditure. Currently, feasibility expenditure is only deductible in limited circumstances where the business undertakes feasibility regularly and the expenditure is so preliminary it does not materially advance a specific capital project. It should be noted that where the total spend on legal fees for the year is less than $10,000 the account does not need to be reviewed for capital amounts. For more detail on deducting feasibility expenditure, refer to our earlier Tax Alert article.
- Common non-deductible adjustments include fines and penalties and the entertainment limitation. Entertainment accounts should be reviewed for expenditure not subject to the 50% limitation rule, such as overseas entertainment, and for the GST adjustment on non-deductible entertainment expenditure, which is 100% non-deductible.
- It is important to review tax depreciation rates on assets acquired throughout the year for correctness and to ensure depreciation has been calculated correctly. For example, depreciation should be calculated from the beginning of the month of acquisition. Low value assets acquired for less than $500 may be immediately expensed. Although, if low value assets are purchased from the same supplier at the same time and the aggregated value exceeds $500 they will need to be capitalised and depreciated.
New rules for employee share schemes
A package of proposals relating to employee share schemes, introduced in the April 2017 tax bill, has been reported back from the Select Committee to the House. The Bill is an update to the current outdated rules surrounding employee share schemes and the proposals aim for equivalent tax treatment to both the employee and the employer regardless of whether remuneration is paid in cash or shares. Refer to our article in this edition of Tax Alert for more details of the reported back Bill, as well as discussion in previous Tax Alert articles here and here.
In addition to the proposed changes, from 1 April 2017 employers have been required to report share benefits under an employee share scheme through the PAYE system. Employers can now also opt into withholding the PAYE on the share benefits.
The Legislation to amend the non-resident withholding tax (NRWT) rules was enacted earlier last year. While the rules are not intended to be complex, they can be difficult to follow in practice, and with the rush of 31 March these changes may be overlooked. Essentially the rules remove the ability for associated parties to defer their NRWT liability on interest by accruing interest on intercompany loans, and defer the payment of interest, which traditionally triggered the NRWT obligation. Under the new rules, the ability to defer the NRWT liability will be limited. Instead, under the financial arrangement rules, a deferral calculation will be required at the end of the second year of the loan. In short, the calculation compares interest deductions taken with interest payments made and may result in an NRWT obligation despite no payment being made. A previous Tax Alert article elaborates on these changes.
This is a quick reminder of the year-end and upcoming tax issues you may want to consider as part of your year end processes. For further information about these and other tax issues that may be relevant to your business, please contact your Deloitte tax advisor.