Tax & Accounting Briefs
Depreciation Allowances
Depreciation allows for the wear and tear on a fixed asset and must be deducted from your income.
You must claim depreciation on fixed assets used in your business that have a useful lifespan of more than 12 months.
Not all fixed assets can be depreciated. Land is a common example of a fixed asset that cannot be depreciated.
You will have to keep a fixed asset register to show assets you will be depreciating. This should show the depreciation claimed and adjusted tax value of each asset. The adjusted tax value is the asset’s cost price, less all depreciation calculated since purchase.
In most circumstances you can choose between the diminishing value and straight line methods of calculating depreciation.
Diminishing Value Depreciation
The amount of depreciation is worked out on the adjusted tax value of the asset. This value is the original cost less any depreciation already claimed in previous years. If you are registered for GST the original cost price should not include GST you have already claimed in your GST return.
Straight Line Depreciation
Depreciation is calculated on the original cost price of the asset, and the same amount is claimed each year. If you are registered for GST, the cost excludes any GST you have already claimed in your GST return
You do not have to use the same depreciation method for all your assets, but you must use whatever method you choose for an asset for the full year. You can change methods for any asset from year to year.
Depreciation Rates
The table below shows the depreciation rates for certain commonly used assets. New assets acquired after 1 April 1995 can be depreciated at these rates plus a 20% loading. Use the IRD’s depreciation rate finder for a quick way to find the rate for assets in the 1996 income year or later.
| Asset | General rate (%) | Rate plus 20% loading(%) | General rate(%) | Rate plus 20% loading(%) | |
|---|---|---|---|---|---|
| Motor vehicles (up to and including 12 seats) | 18 | 21.6 | 26 | 31.2 | |
| Computers | 30 | 36 | 40 | 48 | |
| Software | 30 | 36 | 40 | 48 | |
| Buildings (reinforced concrete or timber) | 3 | 4 | |||
| Office furniture (loose) | 10 | 12 | 15 | 18 |
Donations
Tax incentives for donations of money made by individuals, companies and Maori authorities have been greatly enhanced. The changes include removing the maximum limit on the tax credit for donations made by individuals, removing the 5 percent deduction limit on donations made by companies and Maori authorities, and extending the company deduction to apply to close companies not listed on a recognised stock exchange.
The changes are aimed at facilitating greater giving to charities and other non-profit organisations and encouraging a culture of generosity in New Zealand.
Individuals
The tax rebate for donations is now a “tax credit”.
Section LD 1 allows a person who makes a “charitable or other public benefit gift” in a tax year to claim a tax credit for the tax year equal to one-third of the total amount of all charitable or other public benefit gifts made in that tax year.
Individuals can make a claim for rebates on an IR 526 form.
Companies
Section DB 41 allows a company to claim a deduction for all charitable or other public benefit gifts it makes to a society, institution, association, organisation, trust or fund of any kind as set out in Schedule 32. The deduction is limited to the amount that would be the company’s net income before taking into account the donation deduction.
The deduction is also available to close companies that are not listed on a recognised exchange.
Fringe Benefit Tax
Fringe benefit tax (FBT) is a tax on benefits that employees receive as a result of their employment, including those benefits provided through someone other than an employer.
The four main groups of fringe benefits are:
motor vehicles (refer to the IRD website form more information on how to calclate
low-interest loans other than low-interest loans provided by life insurance companies
free, subsidised or discounted goods and services, including subsidised transport for employers in the public transport business
employer contributions to sick, accident or death benefit funds, superannuation schemes and specified insurance policies.
Gifts, prizes and other goods are fringe benefits. If you pay for your employees’ entertainment or private telecommunications use, these benefits may also be liable for fringe benefit tax
Refer to the IRD website for more infomation on how fringe benfit tax is applied and calculated on:
Gift Duty
Any person making gifts with a combined total value of over $12,000 in any 12-month period must complete a Gift Statement and forward it to the IRD. Any person who gives gifts of more than $27,000 in a year is liable to pay gift duty.
For gift duty purposes, a gift is something given:
when nothing is received in return, or
when something is received in return, but its value is less than the value of the property given.
If something of lesser value is given in return for a gift, the value of the gift, for gift duty purposes, is the difference between the two values.
These items can all be gifts:
- transfers of any items (for example, company shares or land)
- any form of payment
- creation of a trust
- a forgiveness or reduction of debt
- allowing a debt to remain outstanding so that it can’t be collected by normal legal action
The table below outlines the rates of gift duty. For more information on Gift Duty see the Gift Duties Guide .
| Value of Gift | Duty Payable | |
|---|---|---|
| 0 to $27,000 | NIL | |
| $27,001 to $36,000 | 5% of value over $27,000 | |
| $36,001 to $54,000 | $450 plus 10% of value over $36,000 | |
| $54,001 to $72,000 | $2,250 plus 20% of value over $54,000 | |
| Over $72,000 | $5,850 plus 25% of value over $72,000 |
Goods & Services Tax
GST is a tax on the supply of goods and services in New Zealand by a registered person on any taxable activity they carry out. The rate for GST is 12.5% although it can be zero-rated for exports
Certain supplies of goods and services are “exempt supplies”. These include:
Certain financial services
Sale or lease of residential properties
Wages/Salaries and most Directors Fees
GST registration is required if the annual turnover of the business for a 12-month period has exceeded or is expected to exceed $60,000.
If your turnover exceeds $500,000 pa you must file your GST return monthly or bi-monthly.
There are three methods of accounting for GST:
Invoice Basis
Payments Basis
Hybrid Basis
If your turnover exceeds $2,000,000 pa you must use the invoice basis.
If you are selling or are thinking of selling your products through your website, please refer to the next section on “GST and E-Commerce”
For more information on GST see the GST section of the IRD website.
GST & E-Commerce
Sale of Physical Goods via the Internet
If a GST-registered person sells goods via the internet and the goods are physically supplied to a customer in New Zealand, GST is chargeable at 12.5%.
If goods are sold via the internet and physically supplied to customers overseas the sales can be zero-rated for GST purposes. It is important to prove the goods have been exported (entered for export by the supplier) and sufficient evidence should be held to prove the export.
Sale of Digital Goods via the Internet
If a GST-registered person sells digital products via the internet which are downloaded such as music, software or digital books, to a New Zealand customer they must charge 12.5% GST. (These products are treated as services for GST purposes).
If digital products are sold via the internet and downloaded by an overseas customer they can be zero-rated but it is important to prove that the products are “exported” otherwise GST must be charged.
Evidence required to prove products are exported
Scenario 1:
Physical goods are exported overseas by the supplier. The customer is located overseas.
Delivery evidence, for example, bill of lading showing export by sea, air waybill for export via air. Packing list or delivery note showing overseas delivery address. Insurance documents.
Purchase order showing overseas delivery address.
Scenario 2:
Physical goods are exported overseas by the supplier. The customer is located in New Zealand at the time of purchase.
Delivery evidence, for example, bill of lading showing export by sea, air waybill for export via air. Packing list or delivery note showing overseas delivery address. Insurance documents.
Purchase order showing overseas delivery address.
Scenario 3:
Digital products are downloaded by a customer who is located overseas.
The customer should make a declaration at the time of the transaction that they are located overseas and that the products will be used outside New Zealand. For example, “I declare that I am not in New Zealand at this time and will not be making use of this supply in New Zealand” and provide their name and full address.
Evidence of payment received from overseas customer. Credit card information may be a guide as certain credit card number series may only be issued in New Zealand. However, this process is changing and is not entirely reliable.
Email address may suggest that the customer is overseas but is not final proof as a New Zealand resident can obtain an overseas email address.
Internet Protocol (IP) address of the customer – although this is not final proof that the customer is overseas.
Note: In this scenario, as can be seen from the above list, it is unlikely that only one form of information will prove that the customer is overseas. It is expected that a reasonable attempt would be made to confirm the customer is overseas to support zero-rating.
Medical Expenses
No deduction is allowed for expenditure or loss which is of a private or domestic nature.
Expenditure required to remedy an injury or disability to the human body is expenditure of a private or domestic nature, even if the expenditure is to enable the taxpayer to resume earning income by having his or her health restored. Such expenditure is not incurred in the course of gaining or producing income, nor is it an overhead or functioning cost in a taxpayer’s business. Instead, it is a health maintenance cost for a taxpayer as a human being [see TIB Vol 7:1 (July 1995)].
PAYE on Salaries & Wages
Pay as you earn (PAYE) is the basic tax taken out of your employees’ salary or wages. The amount of PAYE you deduct depends on your employee’s tax code
PAYE employees must complete a Tax code declaration (IR 330) as soon as they start working for you. If an employee fails to complete the tax code declaration, you must deduct PAYE at the no-declaration rate.
Every month you must file an employer monthly schedule detailing each worker’s gross earnings and deductions.
If you’re a small employer with gross annual PAYE deductions of less than $100,000, the schedule and payment are made on the 20th of the month following the deductions.
If you are a large employer with gross annual PAYE deductions of $100,000 or more, the deductions made from payments made to workers between the:
- 1st and the 15th of the month are paid by the 20th of the same month
- 16th and the end of the month are paid by the 5th of the following month (except for December payment is to be made by 15 January). The employer monthly schedule is filed along with this payment.
Provisional Tax
Provisional tax is not a separate tax but a way of paying your income tax as the income is received through the year. You pay instalments of income tax during the year, based on what you expect your tax bill to be. The amount of provisional tax you pay is then deducted from your tax bill at the end of the year.
If your residual income tax is $2,500 or more you will have to pay provisional tax for the following year. Residual income tax is basically the tax to pay after subtracting any rebates you are eligible for and any tax credits (excluding provisional tax). Residual income tax is clearly labelled in the tax calculation in your tax return.
There are two options for working out your provisional tax: standard and estimation.
Standard option
The IRD automatically charges provisional tax using the standard option unless you choose the estimation option. Under this option:
Your provisional tax payable is your previous year’s residual income tax plus 5%.
Change in the tax rates may have an effect on the calculation of your provisional tax.
Estimation option
The other way to work out your provisional tax is to estimate what your residual income tax will be. When working out the tax, keep the following points in mind.
To get the right tax rate
add up all your estimated income
work out the tax on the total
then subtract any tax credits (like PAYE).
Using the estimation option, if your estimated residual income tax is lower than your actual residual income tax for that year, you may be liable for interest on the underpaid amount.
You can estimate your provisional tax as many times as necessary up until your last instalment date. Each estimate must be fair and reasonable.
Due dates
If you have a 31 March balance date, provisional tax payments are due on:
| Instalment | Due |
|---|---|
| First | 28 August |
| Second | 15 January |
| Third | 7 May |
Interest
In some circumstances you may be charged interest if the provisional tax you paid is less than your residual income tax. If the provisional tax you pay is more than your residual income tax, the IRD may pay you interest on the difference.
Tax Payer Penalties
Taxpayers who do not meet their tax obligations may face penalty or interest charges. To avoid such charges, you should pay the full amount of tax you owe by the due date.
The main kinds of charges for failing to meet tax obligations are:
- a shortfall penalty where the correct amount of tax is higher than the amount you paid (eg, because of an understatement of tax, or where the amount of a refund or loss is reduced)
- a late payment penalty if you post or deliver a payment to us after the date it was due
- a late filing penalty if you do not file a return by the due date
- interest on the amount of tax you owe if you have underpaid your tax. The interest rates charged are based on market rates.
For more information refer to the IRD’s Taxpayer Obligations, Interest & Penalities
How long should you keep tax records?
The basic rule is 7 years after the year the records relate to. This means, for those who have a March 31 balance date, an invoice dated 30 March 2002, can now be destroyed, but one dated 1 April 2002 must be retained until after 31 March 2010.
The Tax Administration Act 1994 says you do not have to retain records of a company which has been struck off.
If you have a family trust, you must keep details of forgiveness of debt for the life of the trust and would probably be advised to do the same for most other records.
The Companies Act 1993 also has its own rules. you are expected to keep some records, such as copies of annual accounts for 10 years.
