As we approach the end of New Zealand’s tax year (31 March for most) it’s a good idea to check off these tax planning tips. It will help us to get the best result for you as we prepare your New Zealand income tax returns.
Many businesses have been impacted by COVID and there are tax planning tips in here that may help. So consider these tax tips in the run-up to New Zealand’s year-end so that we can help you to get the best outcome.
Our experienced team is well versed in the things to watch out for when it comes to Australian companies carrying out business activity in New Zealand.
When is income taxable?
New Zealand has never had the equivalent of our old simplification method. Income for New Zealand income tax purposes is always assessed on the “accrual” basis rather than on the “cash” basis.
But just because an invoice has been raised doesn’t mean it is to be included in the income tax return.
That’s why we provide you with our New Zealand business income tax checklist when we are inviting you to engage us to prepare the New Zealand income tax return. We don’t want you to be overtaxed!
Income is generally only taxable when you are entitled to enforce the debt.
Therefore if you have raised an invoice to get a deposit, we need to know about that because the deposit isn’t taxable until the work has been done or the goods have been supplied.
Likewise, you may have work in progress. If you aren’t able to enforce the debt (because the job hasn’t been completed) then that income may also be excluded.
On that note, if you are in the construction industry you may be owed retentions. Because you can’t demand payment of those retentions until the final sign off or you receive the engineer’s certificate, even though the amount is owed to you, we won’t be including it in the income tax return until you are able to demand payment.
If you are a land developer and have an unconditional sale agreement in place at the end of the financial year, this won’t become taxable until settlement occurs.
If you have a fixed price contract with a customer and you have received some progress payments then, generally speaking, we will use one of the calculation methods available to us to disregard the amount you actually received and to determine the amount you are actually entitled to.
This can be significantly less.
In order to hurry up payments from your New Zealand customers you may have offering prompt payment discounts at year end. We like to know about that because we can usually make adjustments to reduce your income by the amount you expect to lose as a result of these prompt payment discounts even though you won’t know the exact amount until after year-end.
What if my inventory has been impacted in New Zealand by a drop in sales due to COVID?
If you have been selling stock on consignment, a legal debt won’t come into existence until that customer has on-sold the product. It comes under the same guidelines as in the previous paragraph.
So please remember to let us know the extent to which your inventory has been impacted by way of consignment sales (or complete our questionnaire!).
If you were carrying stock when COVID arrived in New Zealand or have tried selling other items which haven’t worked out as hoped you may find yourself with slow-moving or obsolete stock.
Although stock is usually valued at cost, if the market value (the price you expect to receive net of disposal costs) is below cost you can value your stock at this lower amount. This will increase the cost of sales reducing your profit.
We suggest you review your outstanding customers with a view to writing off their debt if you have given up all hope of recovery.
In order to claim a bad debt you must have permanently ceased all recovery action. There can be no reasonable likelihood of payment and you need to have processed the write-off in your accounting records.
If you need assistance with this, please contact us well before year-end.
What costs can I claim in my New Zealand tax return?
Generally speaking you will be able to claim costs that have been “incurred” even though they haven’t actually been paid by year-end.
To claim the deduction you must have actually paid the amount or become absolutely committed to a payment under law.
That’s one of the areas that we pay careful attention to as the rules are interpreted a little differently between Australia and New Zealand. So we know there is an area of risk when we are looking at books that have been prepared by bookkeepers more experienced with Australian law.
Can I claim outstanding holiday pay and other allowances payable to our New Zealand employees?
No. You can generally only claim these costs if they are actually paid within 63 days of year-end.
Special deduction for some prepaid expenditure
You can claim expenditure that has been paid in advance to your suppliers in some cases even though they haven’t provided the service to you.
For example subscriptions, rates and insurance premiums can all be deducted providing the prepayment doesn’t exceed 12 months.
Furthermore you can deduct prepaid consumables providing they do not exceed NZ$58,000.
You probably know that we are very much across the rules applicable to smaller New Zealand companies paying management fees to related Australian companies.
You may be wondering why we always recommend that we prepare a management agreement for you.
Well, firstly, we know that in the event of a review usually the first thing that is requested is a copy of the management agreement along with the required resolutions. That’s why we supply all of that in our trans-Tasman management fee pack.
But the other reason is because we often don’t know how much of a management fee will be paid until after the year-end.
If we blindly invite you to use the formulas we provide in our agreements, the fee might be more than the New Zealand company could reasonably afford to pay.
The last thing we want to do is to put your New Zealand company in an insolvent position which can have significant repercussions for the directors.
However without a management fee agreement, there is no absolute commitment for a New Zealand company to pay a predefined amount to the Australian entity. For that reason we don’t believe a deduction that is calculated when the tax return is being prepared is deductible unless there is some methodology in place at balance date. (So if you would like us to prepare that management agreement please let us know!)
There is other criteria and we apply this which is why we may have allowed a certain amount without requiring the management agreement. We look at it on a case-by-case basis so we’ll let you know what we believe is the best for you.
But a Management Agreement in place prior to year-end is a strong recommendation.
New Zealand does not have the generous concessions that apply to Australian taxpayers when it comes to deducting the full cost of assets.
It was that blink of the eye period during 2020/21 when COVID was a major concern and Inland Revenue were getting all gooey where the amount was increased to NZ$5000.
However over the 2021/22 income tax year any assets purchased for more than NZ$1000 will need to be capitalised and written off over a period of time.
Feasibility costs in a COVID world
You may have been looking at different ways of attracting new customers or developing new products to try to assist you over COVID.
For example you may be an online distribution business but have engaged experts to consider changing your business model to encourage in-store or contactless pickup.
The report may have come back showing that the costs were likely to exceed the benefits.
Usually when you invest in a project in the form of a feasibility study and it transpires that the idea just won’t work, the amount may not be deductible.
However there is a special provision that says that providing the expenditure didn’t exceed NZ$10,000, you can deduct the amount even if you didn’t go ahead with the project.
If, on the other hand, the project didn’t work out and the expenditure exceeded $10,000, you would need to write that cost off over five years.
The information in this article is indicative of NZ tax rules and changes and not intended to be complete for all intents or purposes and does not constitute advice. It is recommended that you obtain professional advice, suited to your particular circumstances, from us before acting on anything you read.