END OF YEAR TAX ISSUES
To minimise taxable income it is timely to review the following before 31 March 2010:
Bad Debts
Review your debtor's ledger to determine which debts are bad. These debts need to be written off prior to year end to enable a tax deduction to be claimed. Just because a bad debt is actually written off does not mean taxpayers can no longer pursue recovery of that debt. Bad debt write offs also result in a GST refund if GST is filed on an invoice basis.
Repairs and Maintenance
It may be worthwhile undertaking repairs and maintenance prior to 31 March to obtain a full deduction in the 2010 year. Deciding whether expenditure on an asset is deductible as repairs and maintenance or should be capitalised is often a difficult decision. Please contact us if you require any assistance in this area.
Trading Stock
You should be undertaking a valuation of trading stock at year end. Trading stock is generally valued at the lower of cost or market selling value. For valuation of small amounts of trading stock, taxpayers are no longer required to value their closing stock or include any change in the value if:
- Their turnover is $1.3m or less for the year; and
- They reasonably estimate their trading stock on hand at balance date is less than $10,000.
They may simply use the same figure for closing stock as the opening stock. This method of valuation is optional.
Where you have slow selling or obsolete stock a line-by-line valuation writing down below cost is acceptable if market selling value is lower than cost. An overall percentage write down cannot be used.
Retentions
Retentions on building contracts are generally taxable in the year the contractor becomes legally entitled to receive them. Therefore if retentions are outstanding at year end, they usually do not form part of your income for tax purposes for that year, and are therefore only taxed when they become due. This can result in a significant deferral of income.
Holiday Pay Bonuses
Keep a record of staff holidays taken or bonuses paid within 63 days of balance date (that is, on or before June 2 for those with a standard March 31 balance date) because they can claimed as a deduction in the 2010 financial year, provided the holiday-pay entitlement or decision to pay the bonus arose before March 31.
Fixed assets
It is a good idea to review your asset schedule now. The IRD allows you to write off assets provided certain conditions are met – the assets are no longer in use by your business, you do not intend to use them in future, the cost of disposing of the asset is greater that the disposal value (that is, current book value) and the asset is not a building or an asset being depreciated by the pooling method. Fixed assets costing less that $500 excluding GST usually qualify for an immediate write-off in the year of purchase.
Consumables Aids
The cost of consumable aids may generally be claimed as a deduction in the year in which the goods are paid for or are delivered. The deduction is available even if the goods are on hand at year end.
Consumable aids are articles or materials which (without becoming component parts of a finished product) are used in the manufacture or production of goods from which a taxpayer derives assessable income and are either completely or almost completely consumed or become unusable or worthless after being once applied in the process.
The amount claimable is limited by the accrual rules to $58,000 per taxpayer. If the total value exceeds $58,000, then all must be bought in as stock on hand and is therefore taxable.
POSSIBLE GST RATE INCREASE
The Government is currently considering increasing the GST rate from 12.5% to 15% as part of a wider reform of the New Zealand tax system. The new rate could apply from as early as 1 October 2010.
Unless the Government introduces specific rules, the GST ‘time of supply' rules will determine whether GST should be charged at the old or the new rate. Time of supply is generally the earlier of the date of issue of an invoice or the date any payment is received. For example if a contract is entered into prior to the GST rate change, but no invoice is issued or payments made until after the rate changes, the sale will be subject to GST at the new rate.
Credit and debit notes for supplies that took place before the rate increase would need to be issued at the old rate.
Suppliers have a statutory entitlement to increase the agreed price to take into account an increase in GST and to recover this additional amount from purchasers. However, this entitlement does not apply when:
- The relevant agreement was entered into more than 3 months after the rate change;
- The relevant agreement expressly provides for the GST rate not to be increased; or
- The increased rate of GST has already been taken into account in setting the price.
Beware of issuing invoices where the price has been expressed as “GST inclusive” or similar, as you may not have any right to collect any increased amount. To avoid this we recommend that the price payable is always described as “plus GST (if any)”, or similar.
If the rate change occurs part way through your GST return period, then you will need to prepare two GST returns.
Taxpayers accounting for GST on a payments basis will be required to include certain adjustments in their GST return ending on the day before the rate change, for taxable supplies made or received that remain unpaid at the date of the rate change.
Similar adjustments are also required for taxpayers accounting for GST on an invoice basis in relation to second-hand goods acquired prior to the rate increase.
The current “tax fraction” is 1/9th. This will change to be 3/23rds if the rate is increased to 15%.
Please contact us if you require further clarification on any of the above.
BALANCE DATE TAXATION CHECKLISTS
Over the next few days you will receive via the post a letter advising our new web-based questionnaire system of compiling records for your annual financial statements and tax returns. The letter will provide instructions and email log-in details for this quick, easy-to-use system. Be sure to look out for this letter explaining how the new client on-line questionnaire works and how it will assist you and Fraser Accounting in gathering your specific checklist data. If you do not have email access please advise us as we do have systems in place for you and your particular requirements.
