Trust Reporting Requirements
In order to increase transparency, the New Zealand government has implemented new disclosure requirements for trusts that generate assessable income, effective from the 2022 income tax year. Trusts that fall outside of the excluded trusts category will be required to furnish additional information in their annual income tax return (IR6). This includes financial statements, settlement details, beneficiary details, distribution details, and details of persons who hold the power of appointment to add or remove trustees and beneficiaries. The Inland Revenue has also issued various consultation documents regarding the new disclosure rules for trusts. The new disclosure rules are expected to impact up to 180,000 domestic trusts.
Interest deductibility limitation
Another change to keep in mind is the interest limitation rules. These rules will phase out the deductibility of interest expense against income from residential rental properties purchased prior to the 28th of March 2022. From the 1st of October 2021 to the 31st of March 2023, the deductibility of interest expense will be reduced to 75%. For the 2024 income tax year, it will be limited to 50% of the actual interest incurred. This will gradually reduce to 0% by 1st April 2025. However, interest cannot be claimed for residential property acquired on or after 27 March 2021 unless an exclusion or exemption applies.
Provisional tax planning & Tax pooling
If you’re a taxpayer who pays provisional tax, you may be familiar with the challenges of estimating your tax liability for the coming year. If you overestimate your tax liability, you may end up paying too much in provisional tax, which can tie up your cash flow. On the other hand, if you underestimate your tax liability, you may be hit with penalties and interest when it’s time to file your tax return. With GST, FBT and final provisional tax installment payments due shortly after the end of the tax year, it may be stressful to keep a healthy cash flow. Tax pooling can help a taxpayer free up cash flow and reduce compliance cost.
Some other tax matters that should be considered are:
- Legal expenses: review the legal expenses for deductibility that are in excess of $10,000.
- Repair and maintenance expenses: ensure that the repair and maintenance expenses are not capital in nature. Capital expenses involve improvements to an asset, while repair and maintenance expenses relate to restoring or maintaining the asset’s existing condition.
- One-off expenditure items: to ensure that they are deductible for tax purposes.
- Write off bad debts: ensure that all bad debts are actually written off from accounting systems by balance date to be able to claim a deduction.
- Review tax treatment of income derivation to ensure it is recognised the correct income year.
It is important to keep all of your tax documents and records organised and easily accessible. This includes things like pay records, bank statements, and receipts for deductible expenses. By keeping your documents organised, you can make the tax filing process much smoother and reduce the risk of making errors or forgetting to report important information. By staying organised and up to date on the latest tax rules and regulations, you can ensure that your tax filing process goes smoothly and that you maximise your deductions and credits.
It is essential to seek professional advice if you are uncertain about how any of these changes may impact your tax obligations or if you need help filing your income tax return.
At Bellingham Wallace, our team is dedicated to helping clients navigate the tax system and ensuring that their returns are filed accurately and on time. We are available to answer your questions or if you require any specific advice.
Author – Parth Chaudhari