Checklist: Maximise your tax efficiency

Key considerations and actions for year-end

A business expense is generally deductible in the tax year it is incurred i.e. when you have a specific commitment to pay the expense.

Prepaid expenditure

Prepaid expenditure is expenditure that relates to a future period which has been paid in the current period. Generally, the unexpired portion of prepaid expenditure is not deductible, however, there are exceptions where the expenditure has been claimed for financial reporting purposes and the unexpired portion meets certain thresholds with respect to prepaid amounts and time periods. Examples include: 

Repairs and maintenance

The total cost of a service contract can be deducted if it has less than three months to run at balance date and costs less than $23,000 for a full year. Consider expensing short termservice contracts. 

When buying a fixed asset with a warranty or service contract, ensure the warranty or service contract is separately identified, as that part is deductible.

Stationery

Prepaid stationery is deductible when purchased. If you are intending to restock at the beginning of the financial year (i.e for most of you, from April), consider bringing this forward from now to pre 31 March. 

Subscriptions

Prepaid newspapers, journals and periodicals are deductible. 

Prepaid association memberships are deductible provided they extend no more than 12 months after balance date and the subscription is no more than $6,000.

Travel and accommodation

Advance bookings for business-related travel and hotel or motel accommodation are deductible provided they are not more than six months in advance and not more than $14,000. Consider pre-paying your planned travel.

Insurance

Prepaid insurance premiums under an insurance contract are fully deductible where the total premiums incurred in the income year in respect of the contract do not exceed $12,000 and the prepayment is not more than 12 months.

Advertising

Prepaid advertising costs are deductible provided they are prepaid for no more than six months after balance date and the amount prepaid is less than $14,000. Consider pre-paying your planned advertising.

Rent

Prepaid rent is deductible provided it is not prepaid for more than six months and the amount prepaid is less then $26,000.

Consumables

Consumables used in conjunction with but not forming part of the final product (e.g. lubricants) can be deducted in the year purchased provided total stock at year end does not exceed $58,000.

Rates

Rates that have been invoiced on or before balance date are fully deductible.

Bad debts

Debtors that turn out to be bad are deductible. The timing of the deduction depends on the year the bad debt is actually written off.  Therefore, during the final month of the current income year, the following steps should be taken: 

1. Review all debtor balances 

2. Identify all problem balances 

3. Form a judgment on whether a debt will be collected.  If you judge a debt will not be collected, call it bad. Factors to consider: 

• Receiverships and liquidation
• Business ceased
• Length of time outstanding
• Disputed accounts
• Recovery action taken
• Commercially worth pursuing?

4. Write off those which are “bad”: 

• Remove them from your debtors ledger.
• Process journals to the general ledger if running an in-house computer system.
• If you are a company, prepare a directors’ resolution to write-off.
• Don’t forget the GST adjustment for bad debts.

Note: Just because you have written off a debt does not mean you cannot still take recovery action or send statements, provided statements are not generated by your main debtors ledger.

Employee leave provisions

Amounts accrued at balance date for holiday pay, long service leave and sick pay are only deductible if they are paid out within 63 days of year end. Encourage staff to take annual leave within that time if appropriate.

Bonuses

If accrued staff bonuses are not paid within 63 days of year end, they are not deductible until the following tax year. Where possible, accrued bonuses should be paid out within this timeframe. If your balance date is 31 March, the 63rd day will be 2 June.

Warranty and discount provisions

If you offer a prompt payment discount to debtors, you can deduct a provision for the potential discount at balance date. A deduction may also be available for a provision for warranty costs provided the liability exists at balance date and can be reasonably quantified.

Fixed assets and depreciation

Depreciation is claimed monthly i.e. for each month the asset is used or available for use in the business. Depreciation can be claimed for the entire month even if the asset is not purchased until the end of the month.

Confirm that the correct depreciation rate is being used for tax purposes.

Assets costing less than $500 (excl GST) can be expensed rather than capitalised to fixed assets.

If you are contemplating disposing of an asset (sale or scrap) at a loss, consider doing it before year end. If you are contemplating disposing of an asset for more than its book value, consider doing it after year end to defer deprecation recovered.

For any assets purchased with a warranty or service agreement, ensure the warranty or service portion has been separated as this amount is fully deductible.

Imputation credit accounts (companies)

Have there been any shareholding changes during the year? If so, please discuss these with your Grant Thornton adviser before year end if you have not already done so.

Are dividends to be paid before year end? Imputation credits could result in a refund for low income shareholders.

Are tax payments needed before balance date to clear a debit balance in the imputation credit account? A 10% penalty will apply to any debit balance at 31 March.

Losses (companies)

If there have been shareholding changes and your company has tax losses and you have not already discussed these with your Grant Thornton adviser, please do so before year end.

Group loss offsets and subvention payments for the previous financial year must be completed by 31 March this year. By this date, the loss company must have filed an election notice with Inland Revenue and any subvention payment must have been paid.

Income splitting

Have any family members (including children, spouse and civil union partner) on a lower tax rate carried out unpaid work for you?

Consider paying them before year end for work carried out. If considering paying wages to a spouse, sole traders will need prior approval from Inland Revenue.

Alternatively, if you have a trust, this can effectively be utilised to allocate trust income to beneficiaries on a lower tax rate potentially saving you thousands every year.

Fringe benefit tax

We remind you that the “square up” of FBT for the current year for employers wishing to use alternate rates will occur in the March quarter return. Please contact your Grant Thornton adviser if you would like assistance or advice on this calculation as there are often FBT savings when using the alternate rate calculation.

If you provide car parks to employees and have been paying FBT on the value of these benefits, you should get in contact with your Grant Thornton adviser as the Inland Revenue have changed their interpretation on this matter. When the relevant criteria are met this enables a recovery of previously paid FBT, potentially covering the previous 4 years.

Trading stock provisions

Generally, provisions for stock obsolescence or stock write downs are not deductible for tax purposes. Prior to the year end stock take, all obsolete stock should be physically disposed of where appropriate or these items should be valued at their net realisable value.