Tis that time of the year again; - please gather your accounting and tax information for the year ended 31 March 2021.
Set out below is a list of items that may assist you with this process, minimising of taxes, and remind you of some of your tax obligations.
Deductions
Deductible expenses may be claimed in the year in which they are incurred, even though payment may be made in the following year. Following are some special expenses which are either deductible in full or in part when they are incurred, but are related to the next income year.
The following expenses have no restrictions on the amount deductible:
Stationery;
Subscriptions to newspapers, journals, and other periodicals;
Postage and courier costs;
Rates;
Road user charges; and
Audit and accounting fees.
Prepaid Advertising
Prepaid amount less than 6 months and under $14,000.
Bad debts
To be deductible, bad debts must be written off during the income year. A mere provision or reserve is not deductible.
Consumable aids
Amount on hand under $58,000.
Depreciation
Taxpayers have the option of depreciating fixed assets on either a diminishing value or straight-line basis.
Fixed assets can only be depreciated from the month of purchase, eg plant and machinery purchased on 25 March 2020 is depreciated for one month.
Items costing up to $5,000 (net of GST) may be written off in the 2021 year of purchase if certain criteria are met.
Commercial buildings may be depreciated from this year at 2% per annum. This is often seen as a timing advantage with "depreciation recovery" often applying on any sale of the property at a later date.
Disability/income protection insurance
Premiums are deductible in full where the taxpayers are in business on their own account, or are employees.
Discount reserve
A deduction for a discount reserve, such as a prompt payment discount reserve, is allowed if debtors are entitled to this discount.
Holiday pay
The amount accrued at balance date is deductible, if paid within 63 days of the balance date.
Prepaid insurance premiums
Where the total insurance expense under an insurance contract in the year does not exceed $12,000, a 12-month prepayment is claimable.
Other services
Prepaid amount less than 6 months and under $14,000.
Rent for land and buildings
Prepaid amount less than 6 months and under $26,000.
Subscriptions for trade professional associations
A prepayment of 12 months is deductible provided the total amount for that association in the year does not exceed $6,000.
Telephone expenses
A prepayment of 2 months is deductible.
Trading stock valuation
Don’t forget to do a stocktake!
If turnover is less than $1.3m and a reasonable estimate of the true value of stock is made to be under $10,000 then a physical stockcount at year-end is not required and the opening stock value may be used.
Travel and accommodation expenses
Prepaid amount less than 6 months and under $14,000.
Legal Fees
If the total legal expense for the year is $10,000 or less, there is no requirement to identify the capital portion but it still has to meet the general permission criteria for deductibility first.
Fixed Assets
Review your fixed assets schedule for any assets that have become obsolete or should be otherwise written-off.
Income
Review credit notes in the months following balance date for any credits which are able to be taken back into the previous financial year.
Covid 19 Subsidies
Don't forget that the wage subsidies and resurgence support payments received in the 2020 - 21 year will all increase income for tax purposes in the 2021 year. Plan to pay income tax on the amounts of these subsidies.
Rental Properties
Per last year any rental losses are only available to be offset against other rental gains.
Capital gains tax applies in certain cases where the "bright line" test has been breached. With properties now subject to a 10 year timeframe.
In future years interest deductions will be reduced and phased out i.e. deductions will be allowed for 100%-75% in 2022, 75% in 2023, 50% in 2024 and 25% in 2025 and 0% following. All residential rentals will be in profit situations within the next 5 years with significant income tax effects.
Structuring and Top Tax Rate
The top tax rate for individuals has been increased to 39% from April 2021. There may be structuring changes required as the change in the op tax rate has caused in-equity within the tax system i.e. with the trust tax rate at 33%
It is important if you have had significant changes in profit levels this year to contact our office. This is as important for companies that have incurred a loss as it is for companies that have increased income.
Loss Carry Back Scheme
Companies that incur a tax loss this year are able to offset the loss against the previous years income, and where tax has been paid in the 2020 year a refund may apply.
Overdrawn shareholder current accounts
Please contact our office should you believe your shareholders current account is overdrawn at year end. There are options to introduce owner funds, or pay dividends to ensure the account is in a credit position at year end.
Making changes to your tax options
Many changes need to be opted in before 31 March - it is a great time to consider
Changing your GST filing frequency to 2 or 6 monthly.
"Pay as you go" provisional tax options such as AIMs.
Opting in or out of the LTC regime.
Changes to Shareholders to allow distributions.
Incorporation of a limited liability company.
Setup of a family trust.
Please contact our office should you wish to discuss the above in more detail, ph 027 587 0099