For most taxpayers, 31 March represents the end of the financial year. In the lead up to ‘year-end’ there are a number of actions that business owners may want to take to avoid missing the boat on simple tax planning opportunities.
Trading stock: stock can be valued at the lower of cost and market selling value (“MSV”), and generally it will be beneficial to use a lower MSV where possible. But to use MSV you must have evidence that this represents the market value of the specific stock items at or about balance date. The IRD have indicated that suitable evidence includes independent or internal valuations by suitably qualified persons of the price of goods and actual sales for a reasonable period before and/or after balance date.
Accruals and provisions: a tax deduction should be available if you are definitively committed to an expense at year end and can reliably estimate the amount. Ensure all expenditure is captured and accrued to minimise the amount of taxable income. One exception is employee related accruals that are tax deductible if they are incurred and are paid within 63 days after balance date (so by 6 June); consider paying any staff bonuses by then to gain a current year tax deduction.
Bad debts: to be tax deductible bad debts must be actually written off before year end – it’s no good booking the journals after balance date as part of your year-end accounts preparation. There also needs to be evidence that the debt was considered “bad” (e.g. review of accounts receivable, debt-enforcement notices and other actions taken).
Assets: if you are planning on buying any depreciable assets (e.g. plant and equipment), a full month’s depreciation can be claimed in the month of purchase, so it may be worth buying replacement assets just before 31 March.
Relevant to companies only:
Charitable donations: in order to claim a donation deduction, it needs to be paid in cash before 31 March. The amount of the donation is limited to the amount of a company’s net income in the absence of the donation. Hence, if a company has made a loss it might be beneficial to push the payment into the next year.
Shareholder current accounts: if a company is owed money by shareholders, consider paying commercially justifiable shareholder-employee salaries or paying a dividend to settle the debts. If not done, there may be fringe benefit tax or deemed dividend issues.
Imputation Credit Account (ICA) balance: ensure the imputation credit account does not have a debit balance at 31 March, otherwise penalties will be incurred. If the ICA may be in debit, consider a making a voluntary provisional tax payment before 31 March.