Hello,
Please find our March Update Newsletter below.
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Kind regards
The Team at Matley Financial Services Limited
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Year End Tax Planning
As the balance date (31 March) for many taxpayers is fast approaching, we thought it an opportune time to remind you all of year end procedures and issues which need to be considered prior to or as part of year end accounts. These are as follows:
QCs/LAQCs
Election into the Qualifying Company (QC) regime (other than in the case of new companies) usually involves a lead in time of up to one year. Where an election is made, it generally takes effect from the first day of the following income year. Given the proximity to 31 March, there is currently a very short lead in time for electing into the QC regime. Forms must be filed prior to the end of the current tax year unless this is a new company in the first year of trading.
You need to be mindful of the advantages and disadvantages of electing into the QC regime. Disadvantages such as forfeiture of losses, shareholders having to guarantee the income tax debt of the company and the calculation and potential payment of Qualifying Company Election Tax (QCET) need careful consideration.
If it is intended that the company become a LAQC, review to ascertain whether it is appropriate for it to become one. Check to ensure that there is only one share class, there are no existing losses on entry to the regime, and that the level of QCET would not be too high.
Where a company is already a QC, review to ensure that it is appropriate for it to continue as one.
Generally, an election out of the QC regime is effective from the first day of the income year in which that election is made, unless a later income year is specified in the notice. There may be circumstances where it is appropriate to elect out the QC regime, for instance, where the company has struck financial difficulties during the year and may no longer be in a posiiton whereby it can meet its tax liabilities. As the QC regime requires shareholder to guarantee the tax debt, it may be appropriate in such cases to elect out of the QC regime.
You should ensure that prior year group loss offsets, subvention payments and subvention agreements are completed and lodged with the IRD prior to year end. Loss offsets and subvention payments relating to the year ending 31 March 2008 are due on or before 31 March 2009.
You should also ensure that shareholding continuity has in fact been maintained in relation to the carry forward and grouping of losses. 49% continuity must be maintained in the loss company from the time the loss is incurred until the time the loss is utilised. for grouping, commonality of 66% is required. That is, the same group of persons must own 66% in both companies at all times during the continuity period.
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.
Bad Debts
Taxpayers and business owners should be reviewing their 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, this does not mean taxpayers can no longer pursue recovery of that debt.
Repairs and Maintenance
Generally no deductions are allowed for a repairs and maintenance reserve. It may be worthwhile undertaking repairs and maintenance prior to 31 March to obtain a full deduction. Deciding whether expenditure on an asset is deductible as repairs and maintenance or should be captialised is often a difficult decision. Please contact us if you require any assistance in this area.
Fixed Assets and Depreciation
Remember to do a "stock take" of fixed assets at year end with a view to determining whether the fixed assets listed on the depreciation schedule actually exist. Where assets are no longer being used application can be made to the IRD to write off the book value in that year. Where assets have been disposed of or simply no longer exist, a loss on disposal can also be claimed.
Trading Stock
Taxpayers 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 (if lower).
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 $1.3 m or less for the year; and
- They reasonably estimate their trading stock on hand at blaance date is less than $5,000.
They may simply use the same figure for closing stock as the opening stock. This method of valuation is optional. You should consider the accounting implications, if any, of not correctly recording closing stock in the financial statements.
If there are any general stock provisions then these are not deductible for tax purposes. However, a line by line valuation writing down stock below cost is acceptable if market selling value is lower than cost. General write down provisions should therefore be reviewed to determine if a deduction can be taken on a line by line basis.
Imputation Credit Account
The imputation year finishes on 31 March for all companies irrespective of what their actual balance date is. Review your imputation credit account (ICA) balance to ensure that it is either a nil or credit balance at year end. If the ICA is in debit balance this will create a 10% imputation penalty, which is not treated as a "tax payment" for income tax purposes.
If there is a debit balance you will need to consider bringing forward tax payments such as terminal tax due on 7 April 2009 to 31 March 2009 or earlier.
Change in Company Tax Rate - Implications for Paying Out Retained Earnings
The company tax rate has now reduced from 33% to 30%.
However, due to the implementation of a transitional period, a company will be able to allocate imputation credits at a maximum tax credit ratio of 33/67 on retained earnings that have been taxed at 33%. For retained earnings taxed at 30% the new ratio of 30/70 must be used. If the company has 2008 retained earnings that are fully imputed at the 33% rate, these earnings must be distributed by 31 March 2010 if you wish to attach imputation credits at the rate of 33% Otherwise from 1 April 2010 the company can only impute those reatined earnings at 30%, for non resident shareholders this may be preferred by for resident shareholder an extra tax cost will arise.
Please note that when the 33/67 tax credit ratio is used to pay a dividend to a company shareholder, the tax credit available as a credit against the taxable income of the company is limited to 30% being the company's tax rate. The full 33% amount will however be credited to the company shareholder's ICA to enable distribution to the ultimate natural person or trust shareholders.
The transitional period will run from the beginning of a company's 2009 income year to the end of its 2010 imputation year (being 31 March 2010).
Resident Withholding Tax (RWT) Rate
Please remember that the RWT rate on dividends has not changed - it remains at 33%. This means that, if dividends are imputed at the new 30/70 ratio, a further 3% of RWT will need to be deducted from the dividend payment to bring the total tax component up to 33% (some exclusion apply, eg where the dividend is between a "group" of companies or the recipient holds a valid certificate of exemption). In these case the company will need to register with the IRD to become an RWT payer.
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Changes to KiwiSaver from 1 April 2009
The upcoming changes to KiwiSaver you'll need to know about include:
- The minimum employee contribution rate reduces to 2% of a members gross pay.
- The compulsory employer contribution increases to 2% - and won't increase further in future years.
- The employer superannuation contribution tax (ESCT) exemption is capped at the compulsory employer contribution rate of 2%.
- The employer tax credit is removed.
More information on these changes will be sent to employers in mid to late March. Employers will receive a letter explaining what the changes mean, a copy of the KiwiSaver Employee Information Pack (KS3) and instructions on how to order more KS3s and KiwiSaver Employer Guides (KS4).
The Inland Revenue websites www.ird.govt.nz and www.kiwisaver.govt.nz will be updated as well as all publications in time for 1 April.
If you would like to know more about the changes to KiwiSaver, please see http://www.ird.govt.nz/news-updates/like-to-know-april-2009-kiwisaver-changes.html.
Other Tax Changes from 1 April 2009
As well as the KiwiSaver changes, there are other tax changes being made on 1 April.
Personal income tax rates and thresholds change and an independent earner tax credit (IETC) is introduced.
- Employers will need to use new PAYE rates from the first pay period ending on or after 1 April.
- Employees will need to change their tax codes to receive the IETC.
Further information will be included about these tax changes when the IRD send out information in March. As part of that information pack, you'll receive a new Tax Code Declaration (IR330) form along with instructions on how to order more.
In the meantime, go to http://www.ird.govt.nz/news-updates/like-to-know-april-2009-tax-changes.html to find out about the changes.
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Figuring Accountants
Two accountants (David and Ben) were walking along the road when Ben said,
"Where did you get such a great bike?"
David replied,
"Well I was walking along yesterday, minding my own business when a beautiful woman rode up on this bike. She threw the bike to the ground, took off all her clothes and said 'Take what you want'".
Ben nodded approvingly,
"Good choice, the clothes probably wouldn't have fitted".
****
An architect, an artist and an accountant were discussing whether it was better to spend time with a wife or a mistress.
The architect said he enjoyed time with his wife, building a solid foundation for an enduring relationship.
The artist said he enjoyed time with his mistress because of the passion and the mystery he found there.
The accountant (David) said,
"I like both because if you have a wife and a mistress they will each assume you are spending time with the other woman, which leaves you free to go back to the office and get some work done".
***
An accountant (David) was having trouble sleeping so went to his doctor.
"Doctor, I just can't get to sleep at night", he said.
"Have you tried counting sheep?" asked the Doctor.
"Thats the problem", said David.
"I make a mistake and then spend three hours trying to find it".
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