|
Income Tax and GST Income tax and GST are an integral part of a business. Legitimate tax planning and good systems can ensure that the correct amount of taxes is paid. However, should mistakes be made, various penalties and use of money interest can be imposed. To assist you with your income tax and GST obligations we provide a brief and high level summary of the income tax and GST rules that may apply to you. Our summary is of a general nature and should only be used as guide. What Costs Can I Claim for Income Tax purposes?Introduction As a starting point, any costs that have been incurred in your business to generate income are generally tax deductible. However, there are specific tax rules for costs such as the purchase of assets, and other capital costs. These costs generally have an ongoing benefit to the business over a period of years. Therefore, you may be able to claim a proportion of their cost each year, as a depreciation expense. If you have "incurred" an expense, you can claim this cost even though you may not yet have paid it. Some payments appear to be necessary for business but could be of a private or capital nature, such as:
If you are unsure as to whether you can claim an expense please give us a call. Home Office ClaimIf you are conducting a business from your home, then you will be entitled to claim a portion of the following expenses for income tax purposes:
The amount of these deductions is normally based upon the percentage of the home that is used for business purposes, which is generally calculated on a square footage basis. Where GST is charged on these home office expenses (i.e. rates, power etc), a GST claim can be made in respect of the portion of the business expenses, provided you are GST registered. You will need to retain these tax invoices to support your GST claim. It is RHB’s policy not to claim depreciation for home office purposes as the eventual sale of the home will likely trigger a depreciation recovery issue, which will be subject to income tax. However, if depreciation has been calculated in the past then you must continue to do so. If you are unsure of whether you are conducting a business at home or you wish to establish your home as a work place, the following issues should be considered:
Where you only earn passive income such as interest and dividends, it is highly unlikely that a home office claim can be made. TelephoneUnless you keep records to show the contrary, the IRD allows a deduction for 50% of the domestic phone rental, where the phone is used for both private and business, and the business element is reasonably significant IRD policy states that fulltime farmers and orchardists can claim 100% of telephone rental as business, plus any business tolls. InterestGenerally, interest costs can be deducted for income tax purposes where the funds are applied for a ‘business’ purpose. Care needs to be taken when borrowing funds, particularly when purchasing real estate. For example, if you rent your current home and borrow funds to purchase a new house to reside in, the interest charged on this loan will not be tax deductible, as it will not be used to produce income, such as rent. To ensure that your interest tax deductions are maximised, you should consult us before borrowing any significant funds. Revolving credit facilities can present difficulties when trying to calculate the interest that will be deductible. If this facility is used for both business and private purposes then details should be maintained to record the non-business component of the interest. Rates and Water RatesIRD policy states that rates are generally fully deductible for fulltime farmers and orchardists for income tax purposes and any GST charged can be claimed if they are GST registered. Rates on business premises are generally fully deductible for income tax purposes and any GST charged can be claimed if they are GST registered. Travel and AccommodationNew Zealand: In order to claim either all or part of travel and accommodation expenses, there must be a sufficient connection between these expenses and generating revenue for your business. Overseas:If an overseas trip contains a private/holiday element, an apportionment of the costs will be required. In relation to airfares, when the holiday element is minor and incidental to the business purpose of the trip, the IRD may allow the full claim for the cost of the airfare. However, if there are clearly two advantages sought (i.e. business and private), an apportionment will be required for the cost of the airfare. The IRD may request information to support a claim for overseas travel expenses. We recommend that you keep a detailed diary recording daily movements, business contacts visited, business cards, business conducted, diversions from the business itinerary for private purposes, items of expenditure and the total cost of the trip. An apportionment between deductible travel expenses and non-deductible private expenses should be made. This calculation should be based upon the number of days of travel and the number of days applying to business. Where an employer pays for the travel costs of an employee (including a shareholder-employee), fringe benefit tax (“FBT”) will be payable on the travel costs to the extent it is personal. Overseas travel does not generally attract New Zealand GST, therefore a GST claim cannot be made for these expenses. Motor VehiclesVehicle expenses are generally deductible if they are incurred in generating income in your business. If you use a vehicle for a combination of business and private uses, you are generally required to maintain a logbook for a test period of three months every three years to show the proportion of business use. Log books must provide the following information:
Care needs to be taken to ensure that most business journeys recorded in logbooks can be cross-referenced to other records such as diaries, appointment books, quotes, invoices etc. If a vehicle is available for private use by an employee (including shareholder employees) FBT will generally apply. Where the vehicle is subject to the FBT regime, then generally, all expenses in respect of this vehicle can be claimed. Motor Vehicle RatesIf a privately owned car, (i.e. not owned by the business so is not included as a business asset), is used for business purposes, a claim can be made for the reimbursement of these expenses. The Inland Revenue Department allows taxpayers to calculate the business use of a private vehicle by using actual costs, by using a log book or by using mileage rates. The IRD has set mileage rates at 70 cents per kilometre. FBT implications of Motor Vehicles A fringe benefit arises when a motor vehicle is provided by an employer to an employee (including a shareholder employee) where that motor vehicle is available for private use by the employee. This availability for private use may be restricted and so FBT is not payable on the days that the vehicle is not available for private use.We strongly recommend that you contact us if it is likely that a business vehicle will be subject to the FBT regime as we may be able to mitigate the FBT payable. There is an FBT exemption for work-related vehicles, whereby home to work travel in these vehicles will not trigger FBT consequences. The rule for a “work related” vehicle is:
Where there is sufficient connection between entertainment expenditure and your business, these expenses should be deductible for income tax and claimable for GST purposes However, the income tax deduction for expenses that fall into the specified entertainment regime is limited to 50% of the value of this expense. Entertainment expenditure that falls outside of the specified entertainment regime may be subject to FBT regime. You should claim 100% of GST on entertainment expenses that you pay and we will advise of the GST adjustment on completion of your annual financial statements. This adjustment effectively pays back the GST claimed on the non-deductible portion of the entertainment expenditure. Below is a list of the different types of entertainment expenditure and the income tax treatment. Expenses in the table where 50% can be claimed are specified entertainment expenditure.
Please note: Although some to the expenditure above may be 100% deductible, the benefit provided to staff may be subject to FBT. Tax Facts Tax Rates The following tax rates apply to the following, but subject to the income bands:
Trusts If the income is retained in the Trust the tax rate is 33%. If the income is paid or applied to a beneficiary of a Trust within 6 months after the end of the tax year, then this income is taxed at their personal tax rate as listed above. However, distributions of $1,000 or more to minor beneficiaries (children under 16) are generally taxed at 33%. CompaniesFlat rate of 30%. Company tax losses cannot be attributed to its shareholders, unless the Company is registered as a Loss Attributing Qualifying Company (“LAQC”). In order to apply for a Company to enter the LAQC regime, various requirements must be satisfied. We recommend that you contact us should you wish to explore the possibility of utilising the LAQC regime. Provisional Tax If you are a provisional taxpayer, you will generally pay your income tax 3 times a year. You will be a provisional taxpayer where your residual income tax is greater than $2,500. Very simply, residual income tax is the remainder of the tax due after the deduction of any taxes that have been paid at source (i.e. PAYE, RWT etc). With a standard balance date of 31 March, provisional tax payments are due on 28th August, 15h January and 28th May. We will calculate your provisional tax unless you inform us that you wish to undertake this calculation. If you are GST registered you can apply to Inland Revenue to make provisional tax payments on a ratio basis. (You make payments at the same time as your GST payment based on a rate approved by the IRD). Terminal TaxShould you have any terminal taxes to pay, and RHB is your tax agent, this payment will due on the 7th April the following year. For example, your 2009 terminal tax would be due on the 7th April 2010. GST If you are conducting a taxable activity (activity carried on continuously or regularly) in New Zealand with an annual turnover that exceeds or is likely to exceed $60,000 in any 12 month period, you are required to register for GST. If annual turnover does or will not exceed $60,000, you can voluntary GST register for GST provided you carry on a taxable activity. A taxable activity is any activity carried on continuously or regularly, whether or not for profit, which involves the supply of goods and services for consideration. Salaries and wages, financial services, (i.e. bank fees and interest, loan repayments), are excluded from the definition of a taxable activity, so will not be subject to GST. GST is a tax on the supply of most goods and services in NZ. It is generally charged and accounted for at a rate of 12.5%. If you sell goods or provide services to a non-resident of New Zealand, you may be able to zero-rate (i.e. charge GST at the rate of 0%), these supplies. If you are GST registered, you will be able to claim back any GST paid on expenses incurred that relate to the GST supplies that you make, when a valid tax invoice is held. Where the invoice is less than $50 a tax invoice is not required as only proof of payment is needed to support the GST claim. There are special rules regarding second hand goods tax credits where the seller is not registered for GST. When this occurs, you can claim a GST credit to the extent payment is made for these second hand goods. You should record details of the seller. IRD PenaltiesThe IRD have the power to impose penalties in the following circumstances: 1. The late filing of a income tax return (i.e. for a normal taxpayer a tax return filed after 31 March the following year) will incur a late filing penalty, which will be:
In addition, you will lose your extension of time to file your income tax return for the next tax year. 2. Late payment penalties will apply when taxes are not paid on time. This penalty will be calculated as follows:
3. Shortfall tax penalties may apply if you take a tax position (i.e. the calculation of the tax to be paid) is less than should have been paid (i.e. the IRD determines that more tax should have been calculated thus resulting in a tax shortfall). These shortfall penalties range from 20% to 150% of the shortfall of tax depending on the nature of the offence. The IRD have the power to impose use of money interest in respect of any taxes that are either underpaid and/or not paid on time. Use of money interest is charged on a daily basis in respect of any taxes that are overdue. The current use of money interest rate exceeds 9%.
Software solutions for accountants by Acclipse Copyright Rodewald Hart Brown Ltd ©
|
What Can I Claim? (as at 23 September 2009)