TAX YEAR END POINTS
We are racing up to the end of the financial year end. 2020 was a year like no other, so consequently there are some extra issues to consider when dealing with your business’s taxes.
Fully deduct some assets
The low value asset depreciation rules were changed for the year ended 31 March 2021. You can now deduct the full cost of your business assets with a value of less than $5,000 in the year they purchased them. This is instead of having to spread the cost over the life of the asset. This can make a difference as previously the threshold was $500.
Depreciation of buildings
In 2011 the tax rules changed and removed the ability to depreciate buildings. As part of the COVID-19 response, the ability to depreciate commercial and industrial buildings has been reintroduced for the tax year ended 31 March 2021.
If your business is eligible, you’ll be able to claim depreciation deductions in your tax return for commercial and industrial buildings.
These changes are to help:
- you with your business cash flow in the short-term
- economic recovery long-term by encouraging you to invest in new and existing buildings.
It is important to note that residential buildings are not part of these depreciation changes. This is because Government intended to assist businesses and not landlords when enacting these changes. There are some properties, particularly short stay accommodation, that will fall into the commercial category, but residential rentals will not fall into these rules unfortunately.
Wage subsidy position
Although most businesses have crystalised their position in relation to whether they qualify for the wage subsidy, or decided to pay it back to Government, this is a good time to check that the position taken by your business met the criteria. If not, now is the time to take steps to rectify the position to prevent unwanted audit results from Government. As a reminder, the first wave of subsidies required a 30 per cent decline in revenue between January and June the year prior. The second subsidy required a higher threshold of a 50% decline.
Declare a dividend
If your business did well during the 2021 tax year, you will be wanting to declare a dividend. With the new marginal tax rates coming into effect from 1 April 2021, you should pay a dividend before you potentially end up in the new 39 cent tax bracket.
Provisional tax planning
As you finalise your tax position for the 2021 income year, you will be taking a position in relation to provisional tax.
The change in legislation to increase the provisional tax threshold from $2,500 to $5,000 is a permanent change. This means that if you had over $2,500 in tax to pay, after all tax credits were allocated, you were a provisional taxpayer. Now you will only fall into the provisional tax regime if that amount is above $5,000.
This is intended to lower compliance costs for smaller taxpayers and allow them to retain cash for longer. It is estimated that this will reduce the number of taxpayers paying provisional tax by around 95,000. While this may not affect your business, it could well affect your personal tax position.
Remember, your 2021 tax position sets your provisional tax position for the next couple of years.
Careful thought and planning
When you combine the declaration of dividends with your standard remuneration (like shareholder salary) with the new top tax bracket, this new provisional threshold will take a little thought.
Keeping onto your provisional tax payments can avoid some nasty surprises. 2020 saw some leniency regarding use of money interest from Inland Revenue, but we are not guaranteed the same leniency going forward.
Tax year end is always a good time to review the year past and plan for the year ahead. While business is uncertain given the global pandemic is still raging, there are also opportunities to be had.
Restructuring to suit the new way business is being done needs consideration of your tax position too. At Bellingham Wallace we are helping a number of businesses expand as opportunities are many. As part of the restructuring, we consider the refinancing and tax opportunities too.
By Graham Lawrence (Director) and Carla Cross (Senior Associate)