☐ Accounting & Taxation Services Fee Accrual

Following the decision in TRA Case Y17, the accounting and taxation services fees accrual for the current year should be added back in the taxation calculation. This adjustment will reverse in the subsequent year’s taxation calculation when the deduction is taken.

☐ Bad Debts

To claim a tax deduction for bad debts, the debt must be:

• Bad; and
• Physically written off on or before balance date.

The above rules mean you must be able to support that the debt is bad (i.e., you have made reasonable efforts to collect the debt before writing it off).

☐ Companies – Shareholding Continuity & Commonality

The ability to carry forward tax losses is subject to shareholding continuity of 49%. A same or similar business test also enables businesses to carry forward tax losses where they lack shareholding continuity of 49%, but the underlying business continues in operation. This was effective from the 2020-21 year and applies to tax losses incurred from the 2013-14 year onwards. 

The ability to offset losses against the net income of other group companies requires common shareholding of 66%. The ability to carry forward imputation credits is subject to shareholding continuity of 66%.

Note these tests must always be met and not just at year-end.

If you are anticipating shareholding changes, believe you will breach continuity, and may not meet the same business test, forfeited losses can be minimised by accelerating income recognition and minimising deductions where possible. Also, consider the payment of a dividend or making a taxable bonus issue to use imputation credits before they are forfeited.

☐ Controlled Foreign Companies (CFCs)

Except for most shares in Australian companies, ownership of foreign shares has the potential for New Zealand tax to be payable, primarily if the foreign company derives passive income (including, but not limited to, interest, some dividends, and royalties).

If you have an investment in a CFC, then please contact us for further advice.

☐ Cross-Border Transactions

Any transaction with either a related party or that is part of a structured arrangement and results in a taxation mismatch is likely to be subject to hybrid mismatch rules (known as the BEPS rules). These rules are designed to cancel out the taxation advantage of such transactions and may require a disclosure to Inland Revenue. Similarly, entities that have different tax characteristics between two countries are likely to be subject to these rules.

The rules are complex, so if you have cross-border transactions of this type, please contact us for further advice.

Also see the Transfer Pricing comments later in this article.

☐ Cross-Border Workers

New rules in relation to the treatment of cross-border workers took effect from 1 April 2023. An employee of a non-resident employer will be subject to FBT and ESCT as well as PAYE in situations where the non-resident employer does not have a "sufficient presence" in New Zealand to be responsible for employee taxes. A safe harbour is available to protect a non-resident employer from penalties and interest if they have incorrectly assessed their liability to the rules, but strict conditions must be met to qualify.

Non-resident employers who do have New Zealand branches and/or a taxable presence remain responsible for PAYE, FBT and ESCT as they always have.

If you have any cross-border workers, we recommend contacting us for further information.

☐ Depreciation on Commercial and Industrial Buildings

Depreciation deductions were restored for commercial and industrial buildings from the 2020-21 year, with the applicable rates being 1.5% straight line or 2% diminishing value.

Where a commercial or industrial building was purchased after 2011 (when depreciation deductions for buildings were removed), depreciation is calculated based on the purchase price. Where an applicable building was purchased prior to 2011, care must be taken when calculating depreciation as several factors need to be considered, including the tax-written-down book value as of 2011, the cost of capital improvements in the intervening period and whether the 15% fit-out concession was utilised.

Care also needs to be taken with respect of buildings that are used both residentially and commercially.

The Government has announced the proposed removal of tax depreciation deductions for commercial and industrial buildings. While not yet in legislation, it has been indicated that the change will be backdated to be effective from 1 April 2024.

☐ Employee Allowances

Broadly, employees are exempt from tax when they are reimbursed or provided with an allowance for work-related expenses.

For travel or relocations, employer-provided accommodation or accommodation payments will generally be exempt where the employee is temporarily working away from home for a period of up to two years (or three years in the case of capital projects). Employee meal costs or meal allowances will generally be exempt where the employee is working away from home for a period of up to three months.

The subtleties in these rules present both opportunities and pitfalls to employers. Therefore, we recommend you contact us if you are considering providing accommodation or paying a meal allowance to your employees.

☐ Employee Remuneration Provisions

Employers have the choice of either treating all accrued employee remuneration (e.g., bonuses, holiday pay and long service leave) as not deductible in the current year or treating amounts of accrued employee remuneration paid in the 63 days following balance date as deductible in the current year.

We note accrued bonuses paid out within 63 days of balance date may not be tax deductible if there is no evidence a commitment was made to pay the bonus on or before balance date.

Redundancy payments must be paid by year-end for the employer to be able to claim a deduction. That is, the 63-day rule does not apply.

☐ Entertainment

A GST adjustment for non-deductible entertainment must be included as an output tax adjustment in the GST return that covers the earlier of the date the return of income is filed or date the return of income is due. This expense must be added back for income tax purposes.

There is an opportunity available whereby it may not be necessary to make the GST output adjustment. Please contact us if you are interested in finding out more about this.

☐ Feasibility Expenditure

Feasibility expenditure under $10,000 in total is generally immediately deductible if were incurred across an income year in relation to completing, creating or acquiring an asset.

A deduction for total expenditure over $10,000 in relation to abandoned projects may be spread equally over a five-year period starting from the income year in which further progress is abandoned. Please contact us if you would like to discuss this opportunity further.

☐ Fixed Assets

Review the fixed asset register to ensure the assets exist and identify assets no longer used to claim a deduction for the remaining adjusted tax value of the asset.

Assets can be written off if they are no longer used but have not been disposed of, provided:

• The asset is no longer used by you in your business or to produce income; and
• Neither you nor an associated person intends to use the asset in a business or in the future to derive gross income; and
• The cost of disposing of the asset would be more than any proceeds from disposing of the asset; and
• The asset is neither a building nor an asset being depreciated using the pooling method.

Assets costing $1,000 or less qualify for an immediate deduction. This is provided:

• They do not form part of some other asset; and
• They are not purchased from the same supplier at the same time as another asset and the total is more than their relevant threshold.

Auckland businesses affected by the early 2023 flooding and storms may have insurance proceeds or destroyed buildings that have special tax treatment, and we recommend separate advice is taken if that is the case. Refer also to our Tax Talk.

☐ Foreign Investment Funds (FIFs)

There are several available methods to calculate the tax position of interests held in FIFs (for instance, shares held in overseas companies, except for some Australian shares). Where a FIF has been held, a change in calculation method may be desirable to improve your tax position. In some cases, it may be necessary to make an election before year-end to be able to use the best method.

If you have FIF investment, please contact us for further advice.

☐ Foreign Superannuation Schemes

Generally, lump sum distributions from Foreign Superannuation Schemes are included as taxable income using either the schedule or the formula methods. Typically, the longer a taxpayer has been in New Zealand, the higher the amount of the lump sum distribution will be taxable income.

Payments of regular amounts from non-state foreign superannuation are usually subject to tax.

We recommend you contact us for further advice as individual circumstances do vary.

☐ Fringe Benefit Tax (FBT)

The end of the year is a good time to review any fringe benefits that might be provided to employees that might not have been identified.

The top single FBT rate is 63.93%, and alternate rate is 49.25%. The fourth quarter FBT return is different to the other FBT returns during the year. An alternate rate calculation is either compulsory (for those who used the alternate rate during the year) or optional (for those who used the single rate). With the new top tax rate band, it may be worth considering a full attribution calculation to minimise FBT.

A pooled alternate rate option is available where the taxable value of all fringe benefits for the employee is $13,400 or less and the cash pay of the employee is $160,000 or less. In this situation, a single rate of 49.25% can be applied throughout the year.

A close company calculation option is also available where motor vehicles available for private use are provided to a shareholder-employee. A close company can make an election for up to two shareholder-employees in the income year in which they purchase the motor vehicle or first start using the motor vehicle for business use. The effect is no FBT is payable, but income tax deductions and GST inputs related to private use are denied.

From 1 April 2023, employer subsidised public transport fares and self-powered and low-powered vehicles provided by employers may be exempt from FBT.

We can assist in the preparation of FBT returns (including full attribution calculations), the filing of close company calculation option elections and calculations, and general FBT matters if required.

☐ Goods and Services Tax

As part of your year-end procedures, a reconciliation should be undertaken between the entity’s GST return and the balance of the GST account in its financial statements. This reconciliation can provide a useful warning about any discrepancies and provide an opportunity to rectify any issues. Also, the reconciliation is generally requested by Inland Revenue as part of their audit procedures.

If there are unreconciled differences, we recommend a GST review be performed to identify possible system issues.

New rules regarding GST apportionments took effect from 1 April 2023. GST-registered businesses can now elect to treat mainly private or exempt-use assets as if they only had private or exempt use. A full GST input tax deduction may be claimed where items are acquired for $10,000 or less and principally for business purposes.

From 1 April 2024, persons providing "listed services" (e.g., short-stay accommodation, ride-sharing and food delivery) through online marketplaces will be required to collect and return GST. For suppliers who are not GST registered, a flat-rate credit scheme is available to help minimise compliance costs.

☐ Imputation Credit Account (ICA)

Your company's imputation year is from 1 April 2023 to 31 March 2024. Please ensure the ICA is not in debit on 31 March 2024. A debit ICA will attract a penalty of 10%.

☐ Individual Taxes

After 1 April, Inland Revenue will automatically issue pre-populated income tax returns. Where the individual confirms or Inland Revenue is satisfied the information is correct, a refund or tax bill will be automatically calculated. Due to the risk of error, it would be useful to have any pre-populated income tax returns reviewed by us prior to confirmation.

☐ Inter-Company Charges

We recommend a review of inter-company charges be conducted to ensure documentation is in place to support any deductions and minimise any potential income tax or GST risk.

☐ Mixed-Use Assets

The tax treatment of real estate (mainly holiday homes), watercraft (with a purchase price of more than $50,000) and aircraft (with a purchase price of more than $50,000) where the asset is used for both private use and income-earning use and is unused for 62 days or more per year is subject to the mixed-use asset rules. Under the rules, certain losses will be quarantined, and a deduction may only be claimed when the asset derives positive net income.

If the gross income from the mixed-use asset is less than $4,000 per annum, or if you would otherwise have quarantined deductions, the ability exists to opt out from the mixed-use asset regime for that year. This means that income is not subject to tax, but also that no deductions can be claimed. This concession does not apply to close companies.

Complex interest deductibility rules exist in instances where mixed-use assets are held in companies, as well as additional quarantining rules.

If you own mixed-use assets, we recommend contacting us to discuss your options.

☐ Payments to Non-Resident Contractors

The non-resident withholding payment rules may apply if payments have been made to non-residents for services performed in New Zealand. There are exemptions available in specific circumstances. From 1 April 2024, payers will have a 60-day grace period to meet or correct their NRCT obligations and certificates of exemption may have retrospective effect. Please contact us if you require further information.

☐ Payroll

All employers with PAYE and ESCT of $50,000 or more per annum need to file employer information returns electronically within two days of payday. Payments continue to need to be made every month or twice a month depending on the size of the employer.

☐ Prepaid Expenditure

Certain prepayments can be claimed as a tax deduction provided they are expensed for financial reporting purposes. Please contact us if you would like further details.

☐ Provisional Tax

The final instalment of 2024 provisional tax for 31 March balance-date taxpayers is due for payment on 7 May 2024. If the standard uplift method has been used for the first and second instalments, and no estimate is lodged at any instalment, use of money interest (UOMI) is charged on deemed underpayments of provisional tax with reference to actual residual income tax (RIT) only where actual RIT is greater than $60,000.

If actual RIT is less than $60,000 and the standard uplift method has been used and paid in all instalments, then no UOMI applies until the terminal tax due date (7 April 2025 in most cases).

UOMI will generally apply from the first instalment if you or any related entity have either used the estimate method for provisional tax or not paid provisional tax on time using the standard uplift method. UOMI can also apply from the first instalment in the first year of business. If this situation applies, you may wish to consider making use of a tax-pooling intermediary, such as Tax Traders.

Your advisor can help you prepare a draft tax calculation to help determine whether you should make a voluntary payment above the amount due under the standard uplift method. Additionally, they can discuss the advantages and disadvantages of using a tax-pooling intermediary.

☐ Provisions for Warranties & Other Expenses

Provisions for warranties and other expenses are generally non-deductible. However, in accordance with the Privy Council decision in Mitsubishi Motors, it is possible to obtain deductions for provisions in limited circumstances, if appropriate records are held.

☐ Purchase Price Allocation Rules

Since 2021, specific rules apply when allocating the purchase price when assets with different tax treatments are purchased together. Under the rules, it is recommended that the buyer and seller agree on how the sale proceeds should be allocated between taxable, depreciable and non-taxable assets, and that this agreement is documented. This provides certainty between buyer and seller, and the Commissioner can only seek to reallocate the purchase price if it does not reflect market value.

In situations where the buyer and seller do not agree to the amounts allocated and the purchase price exceeds $1 million (or residential land including buildings and chattels exceed $7.5 million), the seller may determine the amounts to be allocated and notify the buyer within three months of settlement. If the seller does not do this within the three-month timeframe, then within six months of settlement the buyer may determine the amount to be allocated and notify the seller and Inland Revenue of the allocation. In all situations the amounts allocated cannot be less than the market value of the assets.

In situations where the seller and buyer have not made a notification, Inland Revenue may allocate the values in which case the buyer may be denied a tax deduction until the following year’s tax return.

☐ Research and Development Tax Credit

A research and development tax credit of 15% is available to taxpayers who engage in eligible research and development activities and incur eligible research and development expenditure. The credit is refundable in some circumstances. If you think your business may engage in research and development eligible for this tax credit, please contact your advisor. It would also pay to have systems in place to track expenditure in order to maximise the level of credit available.

☐ Residential Property "Bright-Line Test"

Where residential property is held for 10 years or less (five years if the property was acquired between 29 March 2018 and 26 March 2021) it may be subject to the "bright-line test" with any profits on sale subject to income tax. There is an exemption for the family home in most circumstances.

"New builds" are subject to a five year bright-line period. Care needs to be taken as the definition of "new build" includes several different scenarios and Inland Revenue is taking a very keen interest on all property transactions.

If you are considering selling residential property held for 10 years or less, or considering transferring ownership as part of a restructure, we recommend seeking advice first as the rules are complex and the consequences can be significant.

The government has announced its proposal to return the bright-line test to a two-year period, effective for property disposals from 1 July 2024. However, this is not yet in legislation.

☐ Residential Rental Property Loss Ring Fencing and Interest Deductibility

From the 2019/20 year, losses on residential rental properties have only been able to be offset against income derived from residential rental properties, either from rental income or application of the "bright-line test".

For residential rental property acquired on or after 27 March 2021 (or for new loans drawn down on existing property), interest cannot be claimed as an expense from 1 October 2021. For property acquired before 27 March 2021 with an existing loan in place, interest deductions are being phased out over four years (ending 31 March 2025), with 50% of interest deductible in the year ended 31 March 2024 for pre-27 March 2021 loans. 

Certain types of residential accommodation will be excluded from the interest limitation rules and there are exemptions for land businesses, residential developments, new builds and "build to rent" developments.

The Government has announced plans to reinstate interest deductions on residential rental property, however the rules are not yet in legislation. A further announcement on 10 March 2024 indicated the reinstatement will not commence until the year commencing 1 April 2024.

☐ Residential Withholding Tax (RWT) on Dividends

The RWT rate on dividends generally remains at 33%, with no upward change to account for the 39% top personal tax rate or the increase in the trustee tax rate to 39% from 1 April 2024. This means any dividends with imputation credits attached at 28% will generally require a deduction of 5% RWT. This RWT is payable by the 20th of the month following the date of the dividend. In addition, dividend recipients at the top personal tax rate of 39% will need to pay top up tax. However, no RWT is deductible when the recipient is a company, at the election of the payer.

When a dividend is paid, detailed information must be disclosed to Inland Revenue. The information required is available here. 

☐ Shareholder Salaries

In light of the Penny and Hooper decision, it is important to ensure that commercially realistic salaries are paid to any shareholder-employees in closely held businesses. Please contact us if you need further help in this area.

☐ Thin Capitalisation Regime

The regime applies where a New Zealand company is owned or controlled by non-residents or where it owns foreign-controlled companies. We recommend you confirm whether your company is subject to the regime and if so, whether its debt level exceeds the applicable safe harbour level. For foreign-controlled companies, the safe harbour applies if interest-bearing debt does not exceed 60% of the value of assets. The thin capitalisation calculation excludes "non-debt liabilities" from assets. It may be possible to undertake financial restructuring prior to balance date to maximise interest deductions.

There are also disclosure requirements (BEPS disclosure) for a company when the New Zealand group debt percentage for thin capitalisation purposes exceeds 40% or higher during the year. 

Due to the complexity of the rules, the disclosure requirements and the likelihood of interest deductions being denied, we recommend having your company’s thin capitalisation position reviewed.

☐ Trading Stock

Various valuation options are available to you depending on annual turnover and the valuation method used for financial reporting purposes.

In general terms, trading stock, including work in progress, is valued at either cost using a cost valuation method or market selling value when this is lower than cost.

The cost valuation methods include cost, or where permitted, replacement price or discounted selling price.

To claim a deduction for obsolete or slow-moving stock, it should be physically disposed of on or before 31 March 2024 or valued at market selling value if lower than cost.

☐ Transfer Pricing

With the increase in transfer pricing audit activity, we recommend any dealings with offshore related parties be formally documented to support the arm’s length nature of the prices applied.

The onus of proof for transfer pricing matters has also shifted to the taxpayer and Inland Revenue has the power to investigate the past seven years in relation to transfer pricing instead of the usual four years, provided notice of a tax audit or investigation is given within the usual four years.

☐ Trusts and Trust Distributions

For trusts on a tax agent’s list, with an extension of time for filing, the distribution date may be the earlier of the date on which the trust income tax return is filed or the date by which the trust tax return is due to be filed. Distributions of current year income by this date allow the income to be taxed in the hands of the beneficiary, rather than in the hands of the trustees.

If the Trust Deed contains a clause requiring the distributions to be made within six months of balance date, this can override the above.

Increased disclosure requirements for Trusts with assessable income have applied since the 2021-22 income year. These include the requirement to prepare a statement of profit or loss and a statement of financial position. In addition, the Trust’s income tax return will include disclosures relating to settlements, details of those who hold power of appointment and further details around beneficiary distributions. 

Due to the increased disclosure requirements, we recommend that you seek assistance with filing your Trust’s income tax returns.

Subject to the necessary legislation passing, the trust tax rate will increase to 39%, effective 1 April 2024. We recommend contacting your advisor prior to 31 March 2024 to discuss any opportunities to utilise the existing 33% rate.

☐ Withholding Tax on Interest

If an interest expense on intercompany loans is either paid in cash or booked via a journal entry then this triggers an obligation to pay resident withholding tax (RWT) or non-resident withholding tax (NRWT) to Inland Revenue by the 20th of the month following the date of the journal entry. 

The above checklist is of a general nature only and does not take into account any specific needs or circumstances. We would be pleased to provide further information on any of the issues highlighted in the checklist.