As the 31 March 2021 draws closer, here are some considerations you should be looking at in regard to the various tax rules when undertaking the year end process.
If you have receivables owing at year end, consider whether any of the debtors balance at year end should be written off as a bad debt.
You can deduct a bad debt to the extent to which the debt is written off as bad during the income year. A debt will be ‘bad’ when a reasonably prudent commercial person would conclude there is no reasonable likelihood the debt will be paid.
Factors that can assist a taxpayer in determining whether a debt is bad include:
The way the debt is ‘written off’ will depend on the accounting and record keeping systems of the taxpayer, so may differ on a case-by-case basis. For example, in the case of a taxpayer who has a computer-based accounting software system, a debt will be ‘written off’ when an authorised person has made the appropriate entry in that system recording the debt as written off.
Along with reviewing your debtor balance for bad debts, it’s worth reviewing whether there are any amounts of unexpired expenditure or ‘prepayments.’
Unexpired expenditure is that which relates to goods that have not yet been used in the business as at year end or services that have not yet been performed at year end. In the circumstance where there is a prepayment, the full amount of expenditure is deductible in the year incurred, however the unexpired portion of expenditure is added back in as income. This is reversed in subsequent income tax years.
However, in limited situations listed within Determination E12, persons are excused from complying with this timing regime for prepayments and are allowed a full deduction in the year of incurrence. For example, a taxpayer should be allowed a full deduction in the tax year of payment if they have prepaid insurance premiums during a tax year and:
A timing regime also applies to holiday pay and bonuses. The rules around timing of a deduction allowed for expenditure on employment income (including holiday pay and bonuses) are dependent on whether the payments are to a person who is a shareholder-employee or not.
For a person/employee who is not a shareholder-employee, employment income that is incurred but not paid during the income year will not be deductible in that income year unless it is paid within 63 days of balance date. The amount that is not paid out within 63 days of balance date must be added back as tax assessable income. Prior to the income year ended 31 March 2018, it was mandatory for employers to track whether they had paid out any employment income within 63 days of balance date and make the corresponding adjustment. However, the employer may now choose whether they do so.
The provisional tax threshold was increased permanently for the 2021 year from $2,500 to $5,000. This means that if a person has Residual Income Tax (RIT) below $5,000 for the 2020 year, they will not be required to pay 2021 provisional tax. However, the person will need to be comfortable that their RIT will not be over $5,000 for 2021, otherwise interest and penalties could apply to an underpayment.
Join me at 11am NZDT on Wednesday 24 March 2021 for a one-hour webinar where we will discuss these tax considerations and many others that you need to remember when undertaking the 2021 year end process.
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March 2021