Time to get organised for tax year-end
Tax Alert - March 2017
By Emma Marr and Veronica Harley
As we gallop towards 31 March we should all be thinking about tax matters that need to be tidied up at year-end and to make sure we’re aware of all the changes that have been made in a very busy year for tax reform. Even if you don’t have a 31 March year-end, it’s a good time to pause and review what has changed in the last year, to ensure that you’ve made any necessary changes to your tax calculations.
A number of important reforms have recently come in to force, or are about to. For example, new rules relating to feasibility expenditure, use of money interest rules on provisional tax, withholding tax on contractor payments, and the R&D cash-out tax credit rules. The Government has also recently released new proposals to reform the transfer pricing, permanent establishment, and thin capitalisation rules, and these are briefly highlighted in this article. We recommend engaging early to determine if the proposals will affect your business, so that you are prepared when they are enacted.
Is an amount taxable income or not?
A major part of performing a tax calculation is identifying whether your profit and loss account includes anything that isn’t taxable income, and whether it omits anything that is. Although often the same adjustments will be made every year, it is useful to consider whether there have been any new sources of income, unusual or one-off receipts during the year, and to consider how they are treated for tax purposes. Any new rules introduced during the year will impact on this exercise so taxpayers need to be aware of new developments when preparing their calculations. The timing of income is also important, as income might be taxable in a different year than it is recognised for accounting purposes. Generally, income is returned in the period it is “derived.” Often credit notes, disputed sales and rebates which give rise to timing issues can be easily overlooked.
Special rules can apply to particular types of receipts, for example, certain insurance receipts and capital contribution amounts received. Income may also be derived over multiple years, especially in the case of long term projects. Common timing issues that arise include determining when retention monies, work-in-progress balances, deposits and progress payments have been earned for tax purposes on long term contracts.
Am I claiming all the deductions I’m entitled to?
Similar issues arise with claiming deductions, as the tax treatment of some types of expenditure differs from its accounting treatment and generally capital expenditure is not deductible for tax purposes. Again, many adjustments to tax deductions will be the same from year to year, but you should always review any large or unusual expenditure items that have arisen during the year. Accounts such as repairs and maintenance, legal and consulting fees should be reviewed to remove any capital expenditure that can’t be deducted immediately, or at all. There is a de minimus exception for legal fees if the total amount spent in a year is equal to or less than $10,000, but if expenditure exceeds that amount the entire amount will need to be analysed to ensure it is deductible.
The tax treatment of feasibility expenditure has changed following a Supreme Court decision in 2016 so Inland Revenue has now published new guidance on how to apply this decision. Generally feasibility expenditure will be deductible when the taxpayer often engages in feasibility activities. Expenditure will also only be deductible where it is not directed towards a specific capital project, or if it is, the expenditure is so preliminary it doesn’t materially advance that project. See the full article on this elsewhere in this issue of Tax Alert.
Remember to check common non-deductible items such as penalties and fines and 50% of entertainment expenditure (with some exemptions – for example, entertainment incurred overseas is 100% deductible).
Timing rules apply to deductions, and generally expenditure is deductible when it is “incurred,” therefore much like with income, expenses may need to be recognised in different tax periods. Prepayments of expenditure (e.g. rent, insurance, consumables, service contracts, etc.) should be considered.
Bad debts are deductible as an expense only in the year that they have been written off, so bad debts should be reviewed to ensure genuine bad debts, or partial bad debts, are properly written-off for tax purposes before year-end.
It is good practice to review tax depreciation rates for new assets, and remember you can depreciate assets for the full month of purchase, not just the day of purchase. Remember that any assets costing less than $500 (low value assets) can be deducted immediately, but not if several low value assets are purchased together at the same time from the same supplier and have the same depreciation rate – such assets must be depreciated.
It can also pay to review assets which are no longer used, as a deduction may be able to be claimed.
The value of trading stock should be reviewed at year-end. Generally trading stock will be valued at cost price. Market selling value which takes into account factors such as obsolescence, slow moving stock, etc. may be used only if it is lower than cost. Where market selling value is used, it must be substantiated with sufficient evidence such as sales records from before and after balance date. Your Deloitte advisor can help you determine whether you have sufficient support to use market selling value.
Smaller taxpayers may qualify to use low-turnover valuation methods which involve less compliance.
Using and keeping your losses
Prior year tax losses might be able to be carried forward and offset against income this year, depending on the type of entity that has incurred the losses. Companies must comply with continuity of shareholding rules, and group companies may be able to use losses from other group companies, subject to grouping and continuity rules. Therefore a key point to check for companies is whether there has been any change in the ultimate shareholding which could cause a forfeiture of losses. It is important to notify your tax advisor of any changes in shareholding prior to any shareholding change so that action can be taken to preserve or manage the use of losses if possible.
Imputation credit accounts for companies
All New Zealand companies (and certain Australian ones) must maintain an imputation credit account (ICA) to record the level of imputation credits a company has. An annual return is filed to 31 March regardless of balance date. If your imputation credit account is in debit at 31 March, you’ll be liable for a penalty equal to 10% of the amount of the debit. A debit balance will generally arise because a company has paid out more imputation credits to shareholders than it had available or there has been a breach in shareholding continuity which results in forfeiture of imputation credits.
We recommend checking the imputation credit account prior to 31 March so any debit balance can be addressed in time.
Transfer pricing for related party transactions
Transfer pricing is a hotter topic than ever, and taxpayers who have related party cross border transactions can expect no mercy if they are not complying with transfer pricing rules. All intercompany or related party transactions and loans should be reviewed, and taxpayers without documentation to support transfer prices should be seriously considering the level of risk that this exposes them to. If current proposals are enacted, the burden of proof in transfer pricing matters is going to shift from Inland Revenue to the taxpayer, so there is no better time than now to tidy these matters up.
Thin capitalisation and interest deductions
Likewise, the thin capitalisation rules, which protect the New Zealand tax base from over allocation of interest expenditure to New Zealand, are in for a major over-haul and will get a lot tougher if recently announced proposals are enacted. If a company’s debt levels are too high compared to equity, it may have to include an amount of income in its tax calculation to offset the additional interest deductions arising from the high debt levels. The rules can apply to both New Zealand residents with outbound investments as well as inbound investments by non-residents.
If you are close to the thin capitalisation limit now, the new rules may well tip you over the limit. This is a good time to review debt levels and get in touch with your Deloitte advisor to help you determine what effect the proposed changes will have on your thin capitalisation ratio.
As the tax year is almost over for 31 March balance dates, this is a good time to review your provisional tax payments and check whether you are currently under- or over-paying before the third provisional tax instalment is due on 7 May 2017 . For those taxpayers on the standard uplift, making voluntary instalments can be a good way of managing any use of money interest that may be payable. If you have underpaid and have a use of money interest exposure, consider using tax pooling to manage this cost. Remember that new, more taxpayer-friendly provisional tax payment options are available from the 2018 income year. See the article outlining these new rules in this issue of Tax Alert.
New rules for withholding on contractor payments
From 1 April 2017 contractors receiving ‘schedular payments’ will be able to elect their own withholding rate without having to apply to Inland Revenue for a special tax code. ‘Schedular payments’ are a wide range of specified payments, including those made to non-resident contractors, company directors, farm workers, commercial cleaners, labourers, entertainers, models, insurance agents, and sphagnum moss collectors (a personal favourite).
Minimum rates apply – non-residents and contractors with a temporary work visa cannot elect a rate below 15%, for all other contractors the minimum is 10%. Standard rates of between 10.5% and 33% apply if the contractor does not elect a rate, based on the particular activity the contractor is performing. If the contractor doesn’t supply their name or IRD number to the payer, penalty rates of 20% (non-resident companies) and 45% (all other contractors) apply. Contractors who do wish to elect their own rate must provide notification to the payer, and more than one change within 12 months requires the consent of the payer. These rules will also apply to contractors working for labour-hire firms.
Tax return filing
Tax returns are generally due by 7 July each year, unless the taxpayer is registered with a tax agent and has an extension of time for filing to 31 March in the following year. Taxpayers with a late balance date (from 1 April to 30 September) must file their returns on the 7th day of the 4th month after the end of the taxpayer’s year, unless registered with a tax agent.
If the taxpayer persistently fails to file by the 31 March due date they will lose the extension of time and a period of good compliance is necessary before the Inland Revenue will allow a taxpayer to extend their filing date again.
Remember that the four year time bar rule applies from the end of the tax year in which the taxpayer files the tax return, so filing a return just one day later on 1 April 2017 will extend the time bar period by another whole year.
This has been a quick run through of a few of the key issues which should be top of mind at this time of year. For further information about these and other issues that may be relevant to your business, please contact your usual Deloitte tax advisor.
March 2017 Tax Alert contents