Provisional Tax Payment Options

A reminder about Provisional Tax due 7 May for many clients.

Here are some payment options available to you:

Pay full amount due – Have funds put aside and can pay now

When you receive the tax payment letter from us:

  1. Log in to your internet banking and select tax payment
  2. Choose INC Income Tax and the correct year
  3. Schedule the payment for the due date.

Payment Arrangement – uncertain of income but can manage some payments (instalment)

If you don’t believe you can make the payment when due, we can help arrange a repayment schedule with IRD. The risk of this is that you will be charged some penalties and interest (see special rules currently for COVID-19 below).

Tax Finance – know you will have funds in future (lump sum)

This method suits those who have income coming in later months and want to use their current cash or working capital for other payments, or minimise interest on bank overdraft.

If you know you will have income coming in a later month (timing of sales, or receipt of customer payments) you can “book” in the tax payment then with TMNZ and pay a small interest fee for this service. TMNZ locks in the amount for you, and as long as you pay the tax by the date on time, there are no penalties and tax is transferred to IRD at the original date.

Tax Deposit – have funds but aren’t sure of required tax or require certainty (lump sum)

This method is useful for large groups of entities with a large total tax liability or when total tax is uncertain (farming clients, uncertain timing of completion of large projects or jobs), or you want certainty you have tax payments secured. If the tax you have deposited is no longer required, you can get the cashback more quickly than if paying to IRD, and earn interest on this.

Flexitax – catch up on old tax amounts as well as future commitments or want to make payments as cashflow allows (instalment)

This method suits those who are uncertain about the tax year ahead. If you have missed a tax payment (even by a day) or want flexibility in your payments. There are no set amounts or payment dates. You pay what they can and when it suits their business cashflow. Saves up to 30% on IRD interest.

 

It is important to keep your tax plan current. If circumstances change for your business, we need to adjust your plan. Let us know as soon as you can about the situation for your business.

Contact us tax@epplett.co.nz or (06) 878 8824 to discuss any of the above options or what may be most suitable for your situation.

 

COVID-19 and provisional tax

COVID-19 has created exceptional circumstances and some exceptional tax relief measures have been introduced:

  • The residual income tax (RIT) threshold for provisional tax increased from $2,500 to $5,000 from the 2020/21 tax year
  • Depreciation for commercial and industrial buildings is reintroduced from the 2020/21 income year. If you are a building owner, you will be able to adjust provisional tax payments immediately in anticipation of additional deductions that become available
  • If your business is affected by COVID-19 and:
    • you need to re-estimate your provisional tax as your income falls short of the estimate and provisional tax has been overpaid, it may be possible to arrange early refunds
    • you are unable to pay tax by the due date, Inland Revenue has the discretion to write-off penalties and interest. When in a position to do so, you should indicate when you can pay the tax, or request instalment arrangements. You may be eligible for a UOMI write off.

You can find more COVID-19 tax information here:

Hardship Application – unable to make payments

In a serious hardship situation where you cannot make any payments, and future income is uncertain, we can assist you with this process with IRD.

Checklist: Can your Business Survive the Holiday Period?

While the Christmas/New Year period is traditionally a slow time of year for business, you still need to meet your expenses.

Ensure your bases are covered before you clock off for the year.

1. Plan ahead

Do a budget to figure out how much you are going to need to cover your overheads. This is especially important if it’s going to be several weeks before you start earning a crust again.

A cashflow forecast will help you identify any issues before they become problems.

2. Get your cashflow in order

You can achieve this by:

  • Prioritising jobs you can complete quickly so you can invoice clients straightaway.
  • Incentivising early payment for completed work by offering a discount.
  • Chasing outstanding invoices.
  • Seeing if you can re-negotiate payment terms with suppliers.
  • Reducing unnecessary spending.

3. Don’t forget taxes

IRD expects GST and provisional tax payments to be made on 15 January 2019. Interest of 8.22% and late payment penalties apply if you don’t.

Here’s a tip: If paying both is going to hurt the bank account, prioritise paying the GST. You can utilise the services of an IRD-approved tax pooling provider such as Tax Management NZ to pay the provisional tax later. They reduce IRD interest by up to 30% and eliminate late payment penalties.

As always, we’re happy to work with you so you have nothing to worry about while you enjoy your summer break. Feel free to give us a call on (06) 878 8824.

The Fringe Issue

Given the importance of keeping your PAYE and GST record-keeping and payments in order, it might be tempting to think that Fringe Benefit Tax, or FBT, is a relatively minor thing. But don’t be fooled. In 2017, Inland Revenue created a dedicated audit team to focus on this issue.

One of the team’s aims is to ensure employers have the right business structures and documentation in place. And it turns out that many don’t.

If this sounds like you, now’s a good time to put things right. Regardless of whether you’re acting correctly or not around FBT, a lack of proper records leaves you in a weak position and liable to negotiated settlements (that is, having to pay more than you expected) or, worse, serious penalties.

Most FBT revolves around company vehicles, so let’s look at what IRD expect from you if you provide one to any of your staff:

  • The employee’s job description and employment contract
  • The company policy on motor vehicles
  • Any private use restriction letter in place, signed by the Directors and the employee
  • Documentation that shows regular checks on the vehicle to ensure it’s not being used for private matters
  • The employee’s performance review notes confirming they’re sticking to company policies.

So, what can you do?

For an SME owner, that’s quite a daunting list, and a good reason to talk to your accountant. An expert, independent set of eyes will help you determine what you need to do in all cases, what you don’t need to do, and also how to go about doing it (including creating proper documentation).

The value of expert advice is heightened by some of the finer points of FBT legislation. For example, did you know that if an employee takes a vehicle home one evening and returns to work with it the next morning, the laws says it’s been available for private use on two days?

Did you know that IRD expects you to check that employees are adhering to restricted use policies at least once every quarter?

Did you know that just because a vehicle has your company logo on it, that doesn’t automatically make it a work-related vehicle, which then means it doesn’t automatically become exempt from the usual requirements of FBT?

Did you know there is also a new option for some companies that have one or two vehicles to elect to use the motor vehicle expenditure rules rather than pay FBT in certain circumstances?

If you didn’t know all those things, take a bow – you’re in great company! FBT is complex, to say the least!

The good news is that IRD also recognises this and will work closely with you to help you comply. The best approach is to get professional advice (that’s us) and, where appropriate, go to IRD for a written opinion on any matters that aren’t crystal clear.

That way, even if IRD disagrees with your FBT return, they’ll see that you’ve taken reasonable care to get things right and may not impose penalties.

So, when are you liable for FBT? Any time you provide non-cash benefits to your staff – which means the list is potentially endless. In practice, however, most non-cash benefits fall into one of these categories:

  • Insurance premiums
  • Motor vehicles
  • Subsidised transport
  • Staff vouchers
  • Offsite carparks

If you would like to discuss FBT for your business, call us today on (06) 878 8824.

To Claim or not to Claim

Planning a business trip with a personal holiday tacked on the end? Renting out the bach and unsure what expenses can be claimed? Whatever your situation, we want to make sure you’re getting the expense claim tax break you’re entitled to.

Here’s the lowdown on legal costs for trust admin, travel expenses, mixed-use assets and sponsorship.

Facing a legal bill for your business or trust? Good news.

Generally speaking, you can deduct any business-related legal expenditure carried out by your company and/or trust if total legal expenses incurred are less than $10,000 in a tax year.

Examples of deductible claims include: expenses relating to protecting trade secrets of the business, opposing the extension of a competitor’s patent, defending an allegation of an infringement of copyright, defending traffic infringements brought against company employees while on company business, and costs for appointing company directors.

Travel expenses – what can I claim?

If your business involves hitting the road, you can claim business travel as an expense. The best way to prove the business portion of your travel expenses is to keep a diary of your travels. Hang on to your itinerary, invoices and tickets. Jot down the reasons for the trip, date of the trip, and costs of any car hire, air/bus/taxi fares, accommodation, meals and incidentals, as well as the time spent on business and non-business activities.

Mixing business with pleasure? If your trip is primarily for work purposes, but contains a private or capital element, you can claim a deduction (e.g where the holiday aspect is incidental to the work element) or an apportionment (where there are two purposes for the trip, both truly separate). If the work side of things is just incidental to the holiday, no deduction can be made.

Got a bach? Claim away.

If your holiday home is being used privately and for income-earning purposes (and is also unused for 62 days or more) you can claim mixed-use expenses. There are three categories to be aware of:

  • Fully deductible expenses: You can claim 100% of any expense solely for the income-earning use of the asset. For example, costs of advertising for tenants for your bach.
  • Non-deductible expenses: You can’t claim any expenses for the private use of the asset. For example, the cost of a jetski stored in a locked garage that’s unavailable to bach renters. You also can’t claim expenses such as improvements (adding on a carport, or upgrading the bathroom).
  • Apportioned expenses: If an expense relates to both income-earning use and private use, you need to apportion it using this formula:

Apportioned expenses formula

These rules can be a little complicated, especially if a company is involved in the mix, so it may pay to come and have chat to sort out how they apply to your business specifically.

When is sponsorship fully deductible?

For sponsorship to be fully deductible, your business must be promoted and any element of private enjoyment must be incidental.

Sponsorship examples that are fully deductible:

  • Sponsoring $2,000 towards the local hockey team’s new uniforms and in return, the team agrees to display your business logo on the uniforms.
  • Sponsoring $10,000 towards the Taupo Relay for Life and in return, the organisers agree to advertise your business across all promotional materials.

If you would like to talk to us about what you can and cannot claim, call us today on (06) 878 8824.

Tax Simplification- IRD is making it easier for you to manage your tax

Positive tax changes that we’ve been signalling for some time are finally taking effect, with key aspects of The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act and the Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Act having come into force on 1 April.

Revenue Minister Judith Collins was bullish about the changes, stating, ‘This package gives businesses more certainty about their tax payments and more time to focus on growing their business’. While she would say that of course, she’s essentially right.
Key aspects include provisional tax changes, changes to use of money interest (UOMI) and penalty fee interest, and simplified reporting for businesses. There are also changes to tighten New Zealand’s disclosure requirements for foreign trusts.

Will yours be one of the small businesses to benefit from this tax simplification? Almost certainly, because the new accounting income method, due to take effect in April 2018 and explained below, will take the headaches and guesswork out of paying your provisional tax.

Of course, change – even positive change – can cause anxiety. What do you need to do to take advantage of these changes? Do you need to do anything differently to comply with them? As always, the best course of action, if you have any questions, is getting in touch with your accountant. We’re here to help.

Some changes to specific types of companies:

Closely Held Companies (CHC)

Small Closely Held Companies represent a significant proportion of New Zealand’s 400,000 companies. The new rules, which are intended to simplify compliance, cover Resident Withholding Tax, capital gains, and the payment of provisional tax.

Look-Through Companies (LTC)

These limited liability companies operate with a tax structure that allows the company to transfer income and expenditure directly to shareholders. Changes to the legislation are designed to ensure LTCs operate as closely controlled companies (as originally intended). The changes are complex, and while the changes include removing the deduction limitation rule for most LTCs, they also affect LTC-owning trusts and their beneficiaries, and the amount of foreign income that can be earned, among other things.

Changes to ‘Safe Harbour’ rules

As part of the changes to the provisional tax rules, the Bill increases the current ‘safe harbour’ threshold at which UOMI applies, from $50,000 to $60,000, and extends the safe harbour to companies rather than just individuals.

The safe harbour threshold basically means that if you have paid tax on the standard uplift method of paying provisional tax (last year’s tax bill, plus 5%) and your tax bill is less than $60,000, you won’t be hit with interest. UOMI may be applicable only from the third instalment.

Before the third provisional tax payment, we can assess your year’s trading and work out how much tax you need to pay.

The amendments also add three requirements to tighten application of safe harbour rules. These will 1.) require a taxpayer to actually make the three instalments required under the standard method to enable them to use the safe harbour; 2.) prohibit a taxpayer who has a provisional tax interest avoidance arrangement from using the safe harbour and 3.) prohibit a taxpayer who has paid the first two instalments under the standard method from changing to the estimation method.

 

Upcoming changes

There has been a raft of legislative change recently introduced which will affect businesses when it becomes effective. At present we are just flagging the changes to you without going too deeply into detail. That said, let’s sketch in how it’s looking.

Provisional tax

The provisional tax changes mentioned last year will apply from 1 April 2018. These include the proposed accounting income method (AIM) of paying provisional tax.

While current methods for calculating and paying provisional tax will still be available, AIM proposes that you pay provisional tax from your accounting software, where you are a business with less than $5m annual gross income. AIM capable software will calculate provisional tax owing throughout the year and enable you to pay provisional tax direct to Inland Revenue. So the year-end tax return becomes more about verifying payments made through the year and making any adjustments or corrections needed.

This could work well for new businesses in particular. Currently, a new business doesn’t have to worry about tax in its first year. But when it enters its second year, it has to meet not only its tax obligations for that second year but also its provisional tax for the following year. This is something of a double whammy businesses struggle with. With AIM, new businesses would start paying tax when they start making a profit, paying instalments over the year timed to the business operating cycle.

With AIM capable software we could monitor tax paid direct from your business and contact you if we notice anomalies requiring further investigation or adjustment. We will discuss with you as part of your annual accounts and tax planning this year whether AIM might be right for you.

Use of money interest

Another part of the package of changes applying from the 2018 income year (i.e. from 1 April 2017 for standard balance date taxpayers) is to remove use of money interest from the first two provisional tax instalments (for those who pay in three instalments) and who continue to use the standard method to calculate and pay provisional tax (commonly referred to as the ‘uplift method’).

Businesses (including companies) and individuals with residual income tax of less than $60,000 and paying provisional tax in three instalments using the standard method will not be subject to use of money interest.

2017 Budget Highlights

Budget purse prised open for election year

Finance Minister Steven Joyce’s inaugural budget continues the theme of steady-as-she-goes stewardship, but was not without a sprinkle of election-year treats. Not so much an election-year lolly scramble – more a smattering of paleo snacks.
The key tax announcement is a change to the tax thresholds. Previously the tax thresholds looked like this:

Income tax bracket Tax rate
$0 – $14,000 10.5%
$14,001 – $48,000 17.5%
$48,001 – $70,000 30%
$70,000 and higher 33%

From 1 April 2018, they will look like this:

Income tax bracket Tax rate
$0 – $22,000 10.5%
$22,001 – $52,000 17.5%
$52,001 – $70,000 30%
$70,000 and higher 33%

Working for Families and the Accommodation Supplement

  • The family tax credit rates will increase from 1 April 2018. The rate for the first child aged under 16 will increase by $9 a week; the rate for each subsequent child will increase by either $18 or $27 per week, depending on the age of the child. However, the family tax credit will abate at 25c in the dollar above an income of $35,000.
  • The Independent Earner Tax Credit (which was up to $10 per week) has been removed.
  • The accommodation supplement rates (which had been unchanged since 2005) are to increase from 1 April 2018. For a two-person household this represents an increase of between $25 and $75 a week, while larger households will receive an increase of between $40 and $80 a week.
  • The accommodation benefit for eligible students will also increase by up to $20 a week.

Call for consultation on black hole expenditure

The Revenue Minister, Judith Collins, announced the release of a discussion document on feasibility expenditure which contains proposals to allow these costs to be deductible. Currently, most expenditure of this nature is neither depreciable nor deductible.

Get ready, get set – End of year tax checklist

Work through the points below to straighten things up for the end of the tax year. Ask us if you would like more information.

Think about Deductions

Bad debts: Write bad debts off in your debtor ledger before balance date so you can claim a deduction. Make sure your records show you have taken reasonable steps to recover the debt prior to write-off. Note the details so we can check the GST adjustments.

Employee expenses: You can claim deductions for holiday pay, bonuses, redundancy payments, long service leave etc., if you commit to them before year end and pay them within 63 days of balance date. Check holiday pay has been calculated correctly.

Expenses: Can you pre-pay expenses such as stationery, postage and courier charges before 31 March? You may be able to claim for them. Check with us. There are limits to how far some prepaid expenses are claimable, such as on rent, insurance, plant and equipment maintenance contracts, travel and accommodation.

Fixed assets: Are you still using all of them? Can some be written off?

Discounts: If you offer prompt payment discounts to debtors and maintain a discount reserve, this may be deductible. Make sure your records are clear. In the first year a deduction of the actual discount percentage is allowed. In subsequent years, the deduction is calculated as an approved percentage. Different rules apply if the credit period offered to customers is more than 93 days.

Repairs/maintenance: Complete planned maintenance or repairs before year end for a tax deduction. Ask us if you aren’t sure whether the expenditure is classified as repairs and maintenance (which would be deductible) or as a capital expense (which wouldn’t).

Stocktake: Dispose of obsolete stock by year end or write it down to its net realisable value (the lesser of cost or market value). If your stock is worth less than $10,000 and turnover for the year less than $1.3m, you won’t need to include your stock movement for tax purposes.

Vehicles: Don’t forget to note your odometer reading at year end. If you keep logbooks noting business and personal use, mileage and costs, ensure these are all in order.

Think about Income

Credit notes: Look for credit notes issued to customers after balance date but related to sales made prior to balance date. Note these so you can reduce your taxable income for the current year.

Increased income: Is this year’s income a lot higher than last year’s? If so let us know. It might be a good idea to consider making a voluntary provisional tax payment.

Losses: Did your group of companies have losses in 2016? Groups of companies may offset profits and losses against each other if you make loss offset elections and subvention payments by 31 March. We can help you with this.

Retentions: Check contracts for the terms on retentions owing. Have you invoiced retentions but they are not payable till work is complete in a subsequent tax year? They won’t count as assessable income for this year. However, If they are payable this year they are assessable income. Note retentions you have invoiced which are not receivable till the next tax year.

Think about Penalties

Dividends: Review planned dividend payments. Your imputation credit account must be in credit at 31 March or penalties arise. Contact us before 31 March so we can help you.

Business Transformation – Upcoming changes

Provisional tax

The provisional tax changes mentioned last year will apply from 1 April 2018. These include the proposed accounting income method (AIM) of paying provisional tax.

While current methods for calculating and paying provisional tax will still be available, AIM proposes that you pay provisional tax from your accounting software, where you are a business with less than $5m annual gross income. AIM capable software will calculate provisional tax owing throughout the year and enable you to pay provisional tax direct to Inland Revenue. So the year-end tax return becomes more about verifying payments made through the year and making any adjustments or corrections needed.

This could work well for new businesses in particular. Currently, a new business doesn’t have to worry about tax in its first year. But when it enters its second year, it has to meet not only its tax obligations for that second year but also its provisional tax for the following year. This is something of a double whammy businesses struggle with. With AIM, new businesses would start paying tax when they start making a profit, paying instalments over the year timed to the business operating cycle.

With AIM capable software we could monitor tax paid direct from your business and contact you if we notice anomalies requiring further investigation or adjustment. If you are interested in exploring what this method can do for your business, we can discuss how we could help you best.

Use of money interest

Another part of the package of changes applying from the 2018 income year (i.e. from 1 April 2017 for standard balance date taxpayers) is to remove use of money interest from the first two provisional tax instalments (for those who pay in three instalments) and who continue to use the standard method to calculate and pay provisional tax (commonly referred to as the ‘uplift method’).

Businesses (including companies) and individuals with residual income tax of less than $60,000 and paying provisional tax in three instalments using the standard method will not be subject to use of money interest.

PAYE

PAYE is the next big ticket item in the business transformation proposals – if they go ahead, employers will be able to file PAYE directly from their payroll system. Though not proposed to start until 1 April 2019, there are some lead up steps that will start from 1 April 2018:

  • payroll subsidy, subsidising employers to outsource their PAYE obligations to listed payroll intermediaries, would cease
  • some minor changes to the PAYE rules for holiday pay paid in advance and aligning when rate changes come into effect

We’ll keep you posted.

Tax Talk – Transforming GST & Faster GST refunds

Transforming GST

Inland Revenue are rolling out other changes to how New Zealanders file and manage their GST as part of ongoing business transformation. More than half New Zealand’s businesses now file their GST through Inland Revenue’s secure online service myIR, or direct from their accounting software. If this includes your business, you may have noticed there’s a new myGST tab on your myIR account. This will provide access to all your GST information.

Taxpayers are now able to use this to register for GST, register as a preparer of tax returns, amend GST returns and accounts, file and pay GST at the same time, set up payment plans, and track GST payments and refunds online.

This is on top of the recent changes for some taxpayers who are now able to prepare and send GST returns to Inland Revenue from their accounting software.

If you would like to talk about how your GST is currently being managed and how the changes might work in practice for you, please contact us.

Faster GST refunds

It is now compulsory for Inland Revenue to provide GST refunds by direct credit to a taxpayer’s identified account, resulting in faster GST refunds. Obviously it’s important that Inland Revenue has your correct banking details. If you would like us to confirm they have your current account details please let us know.

From here on, Inland Revenue will only make GST refunds by cheque if they do not have a customer’s bank details or if there are extenuating circumstances, such as hardship.

Tax Pooling – A way to sort Christmas Cashflow Issues

The period after Christmas can be tough for many small and medium sized businesses.

According to more than half the respondents to a poll conducted by the Employers and Manufacturers Association, January to March is when they tend to experience cashflow constraints.
It’s hardly surprising, really. The period after Christmas is traditionally slow business-wise. Consumers are either enjoying their holidays or getting their finances in order following their festive season spending. Earnings will be down if businesses shut during the break. Others may also feel the pinch if they paid staff bonuses prior to the holiday season.

It is, therefore, understandable how having to make a provisional tax payment on 15 January might be a bit problematic for some.

Still, it does not change the fact that Inland Revenue (IRD) expects this payment to be made on time and will charge taxpayers late payment penalties of up to 20 per cent per annum and use of money interest (UOMI) of 8.27% per cent if the tax is not received on the due date.

However, those who wish to free up cash at a time when they need it most have an option.

Tax pooling is IRD approved and can be used to defer provisional tax payments to a time that suits them – without incurring late payment penalties and UOMI.

This method is cheaper than using many other traditional forms of finance – rates at Tax Management NZ (TMNZ) start from below six per cent – and does not affect existing lines of credit.

No credit check or security is required.

The full amount of finance does not need to be paid back if less tax is owed than first thought. The finance arrangement can be easily extended as well.

Contact our office if you want to discuss how to finance your provisional tax payment.

Entertainment, Functions, Events and Tax

Entertainment

When you’re entertaining clients or colleagues, some entertainment expenses are tax deductible while others aren’t. It can be tricky working out what’s deductible as a business expense and what isn’t.

The basic idea is that an expense is business-related if you spend the money to help your business earn income. Most business-related expenses are fully deductible. If the expense doesn’t help your business earn gross income, it’s private and you can’t claim it as a tax deduction.

It becomes a little trickier when there’s an element of private enjoyment. You might think that the firm’s Christmas party for clients is a business related expense and should be fully deductible because it’s promoting your business, products or services. However:

  • if your clients or employees have a greater opportunity to enjoy the entertainment than the general public, you can only deduct 50% of the costs
  • if anyone associated with the business has a greater opportunity to enjoy the entertainment than the general public, you can only deduct 50% of the costs

Generally speaking, if there’s an element of private enjoyment, the expenses (in addition to the food and drink) associated with events where you entertain clients and/or staff will only be 50% deductible. For instance, this would include the hire of crockery, glasses, waiting staff and music.

There are exceptions. Entertainment supplied for charity is 100% deductible. For instance if you throw a Christmas party for the children’s ward at the local hospital, this is fully deductible. Entertainment enjoyed outside New Zealand is 100% deductible. If you take the team to the Gold Coast for Christmas (lucky them) it will be fully deductible. However, if they contribute towards the cost of their airfares (or anything else), you will need to reduce your expense claim by the amount of the contribution.

Functions and events

Some entertainment expenses are fully deductible but some are not. Use these examples as a guide.

50% deductible

Christmas drinks for team members or clients in the office
Christmas drinks for team members or clients in the pub
Hire of a launch to entertain clients
Restaurants providing food and drinks to team members at a social function in their restaurant
Staff Christmas party on or off the business premises
Function hosted in a marquee at the races (or in a corporate box at the rugby). Includes the cost of tickets and any food and drink provided
A weekend away for the team at holiday accommodation in New Zealand. Includes any food and drink provided

100% deductible

Donating food to a Christmas party in a children’s hospital
Providing morning and afternoon tea for your team
Providing entertainment, including food and drink at your promotional stand for the Cracker Christmas Festival
Holding the Christmas party in Fiji (woo-hoo!)

0% deductible

Taking your family (who don’t work with you in your business) out for dinner to thank them for being patient while you worked long hours and paying for this using the business credit card

GST

If that’s not enough to think about, you will need to make a GST adjustment for entertainment expenses which are 50% deductible. This adjustment will be required to be made at the time your income tax return is filed. Of course, we can help and advise you on this.

Gifts to Clients and Employees

The rule of thumb with gifts is that if they consist of food or drink, you can only claim 50% of the expense as a tax deduction. If you are giving out gift baskets or hampers and some of the contents are food or drink, but not all, the food or drink items are 50% deductible but the other gift items are 100% deductible. When you come to claim the tax deduction, you will need to apportion the expense between the 100% deductible items and the 50% deductible items.

Gifts to clients 

If your Christmas giving includes gifts to clients, remember that some gifts will be fully deductible while others will be only 50% deductible. Use these examples as a guide.

50% deductible

100% deductible

Bottle of wine or six pack of beer Calendar
Meal voucher Book or gift voucher
Basket of gourmet food Tickets to a rugby game
(but not corporate box entertaining)
Box of chocolates/biscuits Movie tickets
Christmas ham Presents (not food or drink)

FBT on gifts and entertainment

If you are giving gifts to your team you may also be liable for fringe benefits tax. There’s a $300 exemption from paying FBT per employee per quarter so if the value of the gift is less than $300 you may be exempt. However, if the value of total benefits for an employee goes over $300 for the quarter year (and provided the total value of all benefits doesn’t exceed $22,500 for the year), the full value of the benefits is subject to FBT.

As for entertainment events, if you invite your team to an event that qualifies as a business-related entertainment expense which is only 50% deductible, you are not liable for FBT as well. So if you are entertaining employees at a party or you’ve hired a launch or holiday accommodation and the expenses for that are only 50% deductible, it isn’t subject to FBT. (On the other hand, if the event is being held outside New Zealand, it will be subject to FBT.)

There are exceptions to this that make it a tricky area so if you’d like more information on a whether a specific event you’re hosting is 50% deductible but may also be liable for FBT, please contact us.

Do you pay yourself from your business?

Do you take regular cash drawings from your business profits to meet personal living costs? You need to be aware of how your personal drawings sit with your tax position.

Sole traders

Sole traders complete an IR3 tax return at the end of the year. Include all business income and expenses in your tax return. Drawings are not a deductible business expense they are not separately disclosed in the tax calculation but they will form part of the accounts disclosure which accompanies the tax return to IRD.  It’s much easier to track this if the cash drawings are taken like a regular salary or wage: weekly, fortnightly or monthly.

Record your drawings for personal use in a cash book or with accounting software. Make sure you do your forward planning so there is enough money in the business to cover the bills after you take your drawings.

Partnerships

Partnerships are largely in the same position as sole traders: you can take regular drawings from the business profits. These are not deductible so don’t include them as a deductible expense in the end-of-year partnership return. The split of profits to the partners at the end of the year does not take into account any drawings taken from the profits.

There is the option for a partner to be paid a salary or wage if there is a written contract of service and this might suit you and the business better. PAYE would be deducted from your salary or wage like a regular employee. You could then claim this salary or wage as a deductible expense in the partnership’s end-of-year return.

Companies

If your business entity is a company, you have more options. Shareholder-employees can:

  • draw money from the company periodically throughout the year. These drawings are recorded in the shareholder current account as a loan. At the end of the tax year, the company calculates a salary amount from the company profits and credits the current account with this amount. You must pay income tax on this, at your marginal tax rate declared on your IR3 Individual income tax return. It is not a deductible expense for the company
  • be paid a regular salary, whether monthly, fortnightly or weekly. PAYE is deducted as for a regular employee provided you have an individual employment contract with the company. The company can claim this salary as a deductible expense in its end-of-year return
  • receive dividends from the company profits, after the tax on those profits has been paid

The company can pay directors and management fees from its profits. These may be included as deductible expenses in the company’s end-of-year tax return.

Whatever the business entity, as with other business records, you must keep records of all drawings, salary or wages for at least seven years.

Circumstances will be different for everyone, and it’s important that you get this right. Please contact us if you want to discuss this further with us.

 

 

 

GST adjustments on private use

Another area that we notice often confounds clients is how to calculate GST deductions on assets that are partly for business use and partly for private use. You can claim GST but only in proportion to the extent the asset is available for producing income. This is called GST apportionment.

Most commonly, this involves a vehicle used for work but also used privately. Lifestyle blocks where there is some commercial use of the land would be another example.

There are a number of factors which affect the GST apportionment and the resulting claim for GST deductions including:

  • proportion of time the asset is available to produce income
  • market value of the asset
  • costs directly associated with the asset being available to produce income
  • overall costs which must be apportioned between business and private use

The calculation changes with factors such as:

  • Was the asset acquired before or after 1 April 2011?
  • Did it cost more or less than $5,000?

This can be tricky to work out but it becomes trickier when the proportion of business to private use changes. Obviously the amount claimable will change too. In these situations we may need to make an adjustment. Questions to be asked in these situations are:

  • Did the asset cost less than $5,000?
  • Is the changed proportion of business to private use less than 10%?
  • Is the value of the adjustment worth more than $1,000?

There are limits on the number of adjustment periods for which you need to make this adjustment. These are determined by the acquisition value of the asset. Once the limit is reached, no further adjustments are made. For land assets such as lifestyle blocks, there’s no fixed limit for the number of times the adjustment needs to be made.

Adjustments are also required for ‘mixed-use assets’ which include holiday homes, boats and aircraft with a cost or market value of $50,000 or more. An example of this is the family bach or crib which the family use for breaks but also rent out during the year. These particular assets are earmarked as special from an income tax standpoint, and the GST treatment reflects that. The GST deductions will be subject to a proportional limitation based on the income-earning days and days used for private use.

In all of these situations, it’s vital to keep good records of when the asset was available to produce income and of any associated costs.

We see a lot of cases where people have landed themselves in a mess trying to work the deductions out themselves. We’d like to make this easier for you – please let us know if you have assets split across business or personal use and certainly let us know if the proportion of business to private use changes. We can also provide you with some tools to help you keep track of your usage.

Changes to land sales could affect you

Are you selling residential land?

From 1 July 2016, a new withholding tax – residential land withholding tax (RLWT) – may need to be deducted from a property sale/disposal where the property being sold/disposed of is in New Zealand and meets the definition of ‘residential land’, and the vendor

  • acquired the property on or after 1 October 2015, and
  • has owned it for less than two years before selling or disposing of the property, and
  • is an offshore RLWT person

Obviously, this affects non-residents. Less obviously, an ‘offshore RLWT person’ includes New Zealand resident companies who have shareholdings of 25% or greater held by foreign persons, and trusts where more than 25% of the trustees are foreign persons. Just because your business is a New Zealand company, it doesn’t mean that you will not be caught by these new rules. It is possible for certificates of exemption to be applied for affected taxpayers. Contact us if you think this may affect you.

Mileage Rates 2016

Inland Revenue announced in May that the Commissioner had reduced the mileage rate from 74c to 72c/km for the 2016 tax year (1 April 2015 to 31 March 2016 for standard balance dates).

If you rely on the standard mileage rate when reimbursing your team for travel, make sure your payroll system is updated to reflect the reduced rate.

Tax Payment Changes

IRD have changed their policy on when payments will be considered to have been received on time. Payments made by post are now treated as made on the day Inland Revenue receives them; the date of posting is irrelevant. It’s therefore up to you to make sure you post your cheques in good time to reach IRD on time. There’s no guarantee that a payment posted on the 18th will reach Inland Revenue by the 20th.

If you’re sending a post-dated cheque, Inland Revenue will not bank it until the date specified. So even though it’s physically received before the due date, it will still be treated as received late if the specified date is after the due date. You can also make payments in person, either at an Inland Revenue office or at a Westpac branch (note Westpac no longer accept cheques for tax payments) as long as you do so before close of business on the due date. Now might be a good time to think about making your payments online, if you don’t already.

Changes to IRD payments

IRD has just announced changes to how they will accept payments.

From 1 October 2014, cheques posted by mail, will need to arrive on or before the due date at IRD, posting on the due date will no longer be acceptable. Also you will no longer be able to pay by cheque at Westpac (EFTPOS and cash are still ok). For more information regarding payments visit the IRD website.