Counting down to the new year
Tax Alert - March 2021
By Bridget O’Meara, Anna Zhang
As we are fast approaching the end of the 2021 tax year, there are some key developments that need to be actioned before 31 March (for those with a standard balance date) along with some standard year-end tax issues to consider. There are also a number of changes which will take effect from 1 April 2021 as the new tax year begins.
Updates resulting from the new 39% individual tax rate
If not already in motion, there’s not much time left to ensure you are implementing process and technology changes that you need to make as a result of the new 39% tax rate for individuals. This also provides an opportunity to review your tax governance of these processes to ensure they are operating in line with best practice.
Employers need to ensure payroll systems are updated for the new income tax rate of 39% on annual income of $180,000 and above. As a result of this rate change, FBT rates are consequentially increased, so these also need to be addressed. See this month’s article on these changes. There is also a new Employers Superannuation Contribution Tax (ESCT) rate of 39%, with the ESCT threshold being $216,001 and an increase to the minimum family tax credit threshold. Your payroll system and associated processes need to be updated to deal with these changes from 1 April 2021.
A new Resident Withholding Tax (RWT) rate of 39% on interest, will take effect from 1 October 2021. Again, processes and systems need to be updated for this. The later implementation date is to allow lenders to implement such changes.
Tax policy and control frameworks:
In light of these changes, it’s a good time to review your tax policies on these processes and ensure appropriate controls are in place to mitigate both financial and reputational risks. See our earlier article on how we can help with adopting best practice tax governance.
Have you remembered these developments for 31 March 2021?
This is a good time to make sure you’ve taken into account changes to the tax rules in the 2021 year, both to check you’ve complied with new rules, and to ensure you’re making the most of opportunities to save money when you’re finalising your income tax return.
Have you bought new assets?
The low value asset threshold which allows assets to be deducted immediately, as opposed to being capitalised and depreciated, temporarily rose to $5,000 (up from $500) for purchases made between 17 March 2020 and 16 March 2021. From 17 March 2021 the threshold will permanently reduce to $1,000.
Do you have feasibility expenditure?
If you’ve spent $10,000 or less on completing, creating or acquiring property that would be depreciable property (including depreciably intangible property) or revenue account property and if progress of the asset is abandoned, you may get an immediate deduction. Note that the legislation which enacts this is currently going through the parliamentary process, but is expected to be enacted before 31 March 2021 with application from the 2021 income tax year, so keep an eye out for this. See our previous article for more details on the proposed new rules.
Did you pay working from home allowances?
In response to the first nationwide lockdown, you may have paid allowances to employees for working from home. Inland Revenue issued a determination which stated that such payments to employees of up to $15 per week are treated as exempt income for the employee, which is in addition to $5 per week to be provided as a tax free telecommunication allowance. Inland Revenue also provided that $400 can be paid tax free when paid to employees to purchase furniture and equipment required to work from home. This applies to payments made from 17 March 2020 to 17 September 2020.
For payments made from 18 September 2020 to 17 March 2021, Inland Revenue issued a variation that removed the requirement that the expenditure or loss must be incurred by the employee as a result of the COVID-19 pandemic. The good news is that Inland Revenue has recently issued a further determination, which confirms this treatment will apply to payments made from 18 March 2021 until 30 September 2021.
Given all this, you need to ensure appropriate records are maintained documenting the nature of allowances and substantiating that any amounts treated as tax exempt are reasonable.
Have you claimed all your tax depreciation?
With effect from the 2021 income year, tax depreciation rates on commercial and industrial buildings increased from zero to 2% diminishing value and 1.5% straight line. If you are able to claim this, both the tax and accounting implications needs to be worked through. See our previous article for more details.
Did you receive a wage subsidy in the current year?
This is a good time to double check that you have treated any wage subsidy claimed correctly in your tax return, Check out our article to make sure you know how to treat the receipt of COVID-19 government assistance and as well any repayments that may have been made.
Are you making losses this year?
If you are expecting to make tax losses in the current tax year, remember that (subject to certain criteria being met) these can also be carried back to the immediately prior year. See our previous article for more information on the rules and how to apply for the carry back.
Have you checked these standard items before year end?
Remember to check these standard year-end items, as it could save you money on your final tax bill:
- Write off bad debts: a deduction can only be claimed when a bad debt is properly written off in your accounts before year-end.
- Check your fixed asset register: make sure you’re using correct depreciation rates and depreciating new assets for the full month of purchase, not just from the day of purchase. Ensure assets you have sold or lost are properly disposed of on the fixed asset register, as this might result in a deduction.
- Review trading stock valuations: if any trading stock is obsolete, you might be able to revalue to market selling value provided this is lower than cost and can be substantiated.
- Check the imputation credit account: a debit balance at 31 March results in a penalty, so you need to make sure it’s not in debit. This applies to all taxpayers, regardless of balance date.
- Check your losses: If you have had a shareholding change during the year, you might have forfeited tax losses. Check that the shareholder continuity rules have not been breached, noting that a new business continuity test is expected to be in place before 31 March 2021; you can read about this here).
- Thin capitalisation: If your company’s debt has fluctuated over the year, you should check debt to asset ratios.
If you have any questions about any of the new rules, or managing any other aspect of the tax year-end please reach out to your usual Deloitte advisor.
March 2021 Tax Alert contents
- What are the tax obligations which come with claiming COVID-19 Government support?
- The tax cost of your fringe benefits is about to increase
- The new 39% tax rate puts tax structuring back into the spotlight – why it may be time to talk about tax avoidance
- Counting down to the new year
- Snapshot of recent developments