Retailers regularly lay claim to significant calendar dates for promotional purposes. Every year, Easter seems to start earlier.
This year’s Easter advertising is competing with slogans like “Making tax time easy for you.” This refers to 31 March, which marks the end of the tax year for the majority of taxpayers. For businesses, it ties in with the end of the accounting year - an annual cut-off date for measuring the financial performance of the business and determining its financial position.
Generally, the accounting rules and the tax rules are fairly similar and share the same broad measurement concepts. One of these is “accrual accounting”. It aims to record related income and expenses within the same measurement period. For example, if you buy something but haven’t yet used it up to earn income, then the cost is carried forward to the next period so it can be matched against the future income.
The Income Tax Act achieves this with a handful of sections called the “matching rules”. It deals with things like trading stock and prepayments. That’s why an end of year stock take is important: the cost of any stock unsold at year end must be added back, so it can be carried forward for deduction in a future period to match the income that arises when the stock is actually sold.
Retail advertising generally encourages a big end of year spend up to maximise the deductions in the current year. The main advantage of this is a timing one: a tax deduction taken today is worth more (in terms of time value of money) than a tax deduction taken tomorrow.
Inland Revenue has discretion to ignore the matching concept for certain types of pre-paid expenses. The discretion is often limited by a dollar amount and a period of time. For example, a prepayment for travel costs can be claimed in the year of payment provided the amount accrued does not exceed $14,000 and the travel is taken within six months of balance date. The same applies to pre-paid advertising costs. There is an unlimited allowance for stationery costs (the focus of some current advertising).
Capital expenditure (the buying of assets) is different because they are depreciated, so there’s no big up-front claim for the cost of the asset. In the year of purchase, the deduction that can be claimed is pro-rated, based on the number of months the asset was owned during the year. For example, if a business bought a new $1,000 computer in March, the deductible amount for the March year would only be $33 ($1,000 x 40% x 1/12).
1 April also traditionally marks the start date for previously announced tax changes. This year will see the following changes take effect:
- The minimum KiwiSaver employer and employee contribution rate increases from 2% to 3%.
- The student loan repayment rate increases from 10% to 12% (over the repayment threshold of $19,084) and the early repayment bonus is abolished.
- The childcare and housekeeper tax rebate is abolished.
- The child tax credit is abolished – and replaced by a limited child income exemption.
- Inland Revenue has advised that 31 March 2013 is the last date for concessionary treatment of taxpayers who make Penny & Hooper related voluntary disclosures. (That case involved surgeons who used a company and trust structure to limit their personal income from services provided).
- Lease inducement and lease surrender payments will, generally, become taxable to the recipient and deductible to the payer.
Although the end of the tax year is unlikely to be a cause for celebration, it is an important date in the business calendar that should be considered.
Further enquiries, please contact:
Grant Thornton New Zealand Ltd
T +64 (0)3 379 9580