Countdown to 2016 – Are you looking to reduce your end of year tax expense?
As the new financial year rolls around it’s that time of the year for business owners to start planning for year end and reviewing their records. Read on, as our following list will assist you to prepare and claim deductions available and provide you with opportunities to minimise your end of year tax expense.
- Acquired Assets – any asset acquired individually or together with other assets in the same class can be written off providing the total purchase price is $500 or less (excl GST).
Depreciation can be claimed from the first day of the month of purchase.
If an existing asset is traded in, ensure the asset is capitalised at its full cost i.e. before deducting the trade in cost.
Consider whether asset splitting for residential property if used for investment purposes or asset pooling for commercial property is possible to maximise depreciation deductions.
- Disposed Assets – any assets sold, stolen, scrapped, destroyed or traded in should be adjusted for. Make sure you keep records of dates and amounts. Defer any sales until after 31 March if you have a profit on the sale.
- Scrapped Assets – any assets no longer in use should be written off.
Bad Debts You are entitled to claim a bad debt deduction for any debts that have gone bad. In order to claim a deduction for a bad debt, you must write the debt off in your accounting system by 31 March (if this is your balance date). In addition you must have sufficient documentation to prove that the debt is indeed not recoverable. You will also need to make an adjustment for GST previously returned to the IRD. If the debt is later recovered, the amount needs to be accounted for as income.
Bonuses and Holiday pay
Any amounts payable to employees at balance date for bonuses, holiday pay or long service leave are only deductible as an expense if they are paid either by or within 63 days of balance date, otherwise they will not be deductible until the following year.
Any donation amounts to charitable organisations up to a maximum of a company’s taxable income for the year can be claimed at year end.
Certain prepaid expenses can be claimed as a tax deduction in the current income year. There are restrictions on some expenses in terms of the limits that can be claimed. If you have any prepaid expenditure, ensure that you document when you paid it, what it was for, and what period it covered or was paid to. Some examples include rent, insurance, advertising and subscriptions.
Dividends for the 2014-15 year should be paid or credited before 31 March 2015. Dividend withholding tax will be payable on 20 April 2015. Consideration must be given to ensuring the company has sufficient imputation credits, which may mean bringing forward a tax payment.
If required, contact the Hayes Knight team who can assist you with any dividend considerations.
Repairs and Maintenance
Any amounts for service contracts can be deductible provided the contract has less than 3 months to run at balance date and costs less than $23,000 for the full year.
A one year warranty purchased with a fixed asset can be deducted as an expense rather than capitalised providing the cost of the warranty can be separately identified. Check your repairs and maintenance ledger for any capital items that should be coded as an asset.
You can either value closing stock at cost or market selling value (if lower than cost). A stock take as at 31 March will help ensure that you have an accurate record of the stock and that your system and physical stock levels agree. If you have obsolete stock, then these items should either be disposed of before balance date, or valued at market selling value, which will presumably be lower than cost. Stock value has an impact on the taxable profit position for any business, so this is an area that should be reviewed closely. Note if your turnover is less than $1.3m and you can reasonably estimate that you have less than $10,000 in trading stock then you can use your opening stock value.
Certain subscriptions are deductible without adding back unexpired amounts e.g. newspapers, journals and periodicals. In addition association memberships are deductible provided they extend no longer than 12 months after balance date and the subscription does not exceed $6,000.
These are a just sample of the main areas you should review to ensure you have considered all available deductions which can be claimed. Through careful management you can generate positive cash flow benefits through the minimisation of current year tax. A welcome relief to most businesses looking to stretch cash flow in a growing economy.
If you have any further questions regarding these deductions, please contact the team at Hayes Knight.