There’s plenty of uncertainty out there about what the next few weeks and months will look like as Omicron sweeps through the community in full swing and geopolitical turmoil impacts financial markets and inflation. However, as the saying goes there are two certainties in life – death and taxes. So, as we are rapidly approaching the end of the 2022 tax year (for most taxpayers), it is a good time to turn your mind to end of year tax matters.
Businesses should be planning for the fact that COVID-19 may disrupt the stocktake process and have a contingency plan in place.
Many businesses will be carrying inventory at higher levels than usual because of ongoing supply issues have meant that stock has had to be ordered many months in advance. Others will be carrying far lower stock because they have had issues sourcing stock.
Inflationary pressures from supply chain disruptions will also mean that the value of inventory being carried may be higher than expected too.
We expect that the value of inventory being carried over is likely to have a considerable impact on profitability for the current year for many businesses.
Work in progress/invoicing
You all know the old adage – “Cash is king”. Year-end is time to catch up on your invoicing if you have not already done so.
These days, banks are generally wanting information sooner rather than later. Therefore, it is a good idea to ensure your financial records are up to date so that draft financial statements can be provided to the bank in a timely manner if required.
To allow a tax deduction for the year ended 31 March 2022, a bad debt must be written off on or before 31 March 2022.
The requirements for writing off a bad debt are:
- The taxpayer decides the debt is bad – the test for this is that a debt is bad when “a reasonably commercial person would conclude that there is no reasonable likelihood that the debt will be paid”; and
- The debt is written off as bad in the accounting records. This requires a positive step such as the processing of a journal entry.
Note that writing a debt off as bad, does not prevent you trying to recover that amount in the future. If a debt has been written off is later recovered, that amount is treated as income.
Tax payment planning – 3rd Provisional tax payment
For many taxpayers, the 3rd provisional tax payment (7 May) is the most important as that is the date when use of money interest accrues from for most provisional taxpayers. Therefore, it is really useful if the financial records are mostly complete by then to allow a solid estimation of the amount due to minimise use of money interest.
A few things to watch for this year’s tax planning:
- For some high earning individuals (including individuals deriving income from partnerships and LTCs), the 39% tax rate may create some surprisingly large 3rd provisional tax payments.
- While the legislation has not passed yet, the Government had announced interest deductions will be denied for residential rental properties acquired on or after 27 March 2021 or reduced to 75% for residential rental properties acquired before 27 March 2021. There are numerous exceptions for this.
- The property market has been booming until recently, so large taxable profits may have derived on properties sold that were captured under the 5- or 10-year bright line rules.
- The value of closing stock might be a lot higher than you anticipate and this could have a considerable impact on profitability.
- At the time of writing share markets are down, so investment income may be lower than prior years.
- At the time of writing the NZD has been relatively stable against other major currencies across the 2022 financial year, so FX gains or losses shouldn’t be material.
If cash flow is tight, then “tax pooling” allows a low-interest cost for deferral of the 7 May tax payments for up to 13 months.
Loss carry-back scheme axed
In the early stages of COVID-19, the Government introduced the ability to carry back 2020 tax losses to 2019 and 2021 tax losses to 2020. At the time of the announcement, this was described as a temporary scheme that would be replaced by a permanent loss carry back scheme in due course.
We have recently learned that the permanent scheme has now quietly been dropped by Government. Therefore, we need to assume that the loss carryback will not apply in relation to FY22 losses.
We understand that there is lobbying underway to extend the temporary scheme due to ongoing disruptions from COVID-19, so watch this space.
Distributions/overdrawn current accounts
If you have a company with an overdrawn current account, you might want to consider paying a dividend to improve the current account, so the company doesn’t need to charge interest.
However, if the shareholders are individuals, be mindful of the 39% top tax rate that applies for 2022. Paying interest at the current prescribed rate 4.5% maybe preferrable than having to pay additional tax as a result of paying a dividend.
The due dates for tax returns and payments remain unchanged. However, Inland Revenue has been given broad powers to write off interest and penalties for businesses affected by COVID-19.
While much of the world has moved on from COVID-19, a return to normal for supply chains seems to be many months away and the war in Ukraine has seemingly removed the chance of a normal second half of 2022. Inflation is forecast to be significant for 2022.
Presumably, the reserve bank will continue to raise interest rates in the near term, but the NZD is not rising on the back of these changes. Therefore, rising interest rate rises are not having the effect of reducing import costs like they normally would.
Anyway, when it comes to budgeting for the short to mid-term, our takeaway is to build in increases in costs basically across the board and be prepared to increase your own prices where the market allows.
1 April 2022 changes
As you will probably be well aware the Government has decided to raise the minimum wage from $20.00 to $21.20 from 1 April 2022. The “starting-out training wage” also increases from $16 to $16.96. Both of these are 6% increases. On the one hand these increases offer, or at least appear to offer, relief to low-income households who will be struggling with sharp rises in the cost of living. That is all well and good, but unfortunately, increases in the minimum wage are also massively inflationary (particularly in the cost of food) which is the last thing the country needs right now. Therefore, the increases for low-income households will be quickly eroded.
ACC levies are changing:
- Earner’s levies (the amounts deducted from employees’ wages) are increasing 6% from $1.21 per $100 income to $1.27 per $100 income.
- On the other hand, average Work levies are decreasing from 67 cents per $100 to 63 cents per $100. Please note that this is the average, and the actual change differs industry by industry.
The rebate side of the clean car emissions scheme has been in force for some time, but fee side of the clean car “feebate” comes into force from 1 April 2022. This will impose a fee for many newly registered vehicles. The maximum fee is $5,175 for a new vehicle or $2,875 for a used vehicle.
The student loan repayment threshold increases from $20,280 to $21,268.
The student loan and Earner’s levies will impact payroll. Employers will need to ensure that they are calculating their payrolls in update date software.