There are many good reasons why during the lockdown you should spend time getting your financial accounting and tax affairs up-to-date.
As the impact of the lockdown continues, never has it been more important to have accurate and up to date financial information.
Completing your financial statements for the year ended 31 March 2020 promptly will give you an accurate picture of your financial position and provide a solid base for financial forecasts.
It will also allow you to form appropriate plans for dealing with future tax payments and pursue the early release of any tax refunds or eligible tax credits.
Set out below are a few important matters to consider.
2020 Provisional Tax – 7 May 2020
For provisional taxpayers with standard 31 March balance dates, the third (last) instalment of 2020 provisional tax (P3) falls due on 7 May 2020.
For some businesses the impact of the lockdown in the fourth quarter of 2020 will have been severe and paying their 2020 P3 based on a prior year uplift will make no sense. For other businesses the impact on the results to 31 March 2020 may not have been so significant, with the impact expected to be more of a hit in the 2020/21 year. In both cases preserving cash may be an absolute priority.
Thankfully there are a number of options available to be considered for P3. To ensure the optimal decision is made we recommend the following:
- prepare an accurate statement of financial position for the year ended 31 March 2020 and estimate of the expected income tax liability for the business and the shareholders.
- Compare the expected income tax payable to the provisional tax paid to date (at P1 and P2) and determine the amount required for P3.
- Where the P3 instalment is lower than the amount required under the prior year uplift, consider making an estimate prior to 7 May 2020. If applicable request a refund of previously paid provisional tax. The easiest way to get a refund of provisional tax may be to file the 2019/20 income tax return promptly.
- Where the P3 instalment is higher than the amount required under the prior year uplift but the business requires to preserve cash, evaluate the options of deferring payment of the P3 instalment. These options include:
- paying P3 on a prior year uplift basis and leaving the balance to pay until terminal tax date (7 February 2021 or 7 April 2021 where there is an extension of time arrangement with a tax agent). Use a tax finance or tax purchase option available through a Tax Pooling intermediary to reduce any UOMI payable on terminal tax
- do not pay any amount at P3 but use a tax finance or tax purchase option available through a Tax Pooling intermediary closer to terminal tax date to eliminate any penalties for late payment and reduce UOMI costs if you are liable to UOMI; or
- entering into an instalment arrangement with Inland Revenue.
While Inland Revenue have announced they will remit interest and penalties where failure to make payment can be clearly attributed to the impact of COVID-19 it is not a blanket guarantee of remission and you should consult with your tax adviser prior to the due dates for payment.
Taxpayers who are able to continue to make their tax payments should apply the rules in the normal fashion and not rely on an assumption that remission of interest and penalties will automatically be granted. There needs to be a clear connection between not being able to pay the tax and the impact of COVID-19.
2021 Provisional Tax
The first 2021 provisional tax instalment date from date of writing is 7 May for businesses with a 30 November balance date, followed by 28 May for businesses with a 31 December balance date.Typically, the first instalment would be based on a prior year uplift of 110% of the 2019 tax return, or 105% of the 2020 tax return if it has been filed.
In many cases this may not be an appropriate base on which to calculate the 2021 P1 instalment and the options mentioned above for P3 should also be explored at that time.Consideration should also be given to the appropriate time for filing the 2020 tax return – uplift of the 2019 year may give a lesser result than uplift of the 2020 year, or vice versa.
Use of a Tax Pooling Intermediary for the payment of 2021 tax should also be considered.
Keep Filing Your Returns
Inland Revenue have made it clear they wish taxpayers to continue to file GST, PAYE, and FBT returns on time even where a payment for any tax arising on the returns cannot be made due to COVID-19.
This will allow Inland Revenue and Government to obtain important information on the financial impact on the economy and on the tax debt levels accumulating.They have clearly stated they will work with taxpayers to help them through the financial impact of COVID-19.
Where you are expecting a GST refund look to file the GST return early, rather than wait for the due date to file.
Maximise the Reliefs
In preparing the 2020 tax calculation or forecasting the 2021 tax position, don’t just follow last year’s workpapers.Make sure you fully maximise recent changes introduced as part of the COVID 19 relief measures. These include
- The temporary increase in the lower value asset write off threshold from $500 to $5000 for assets purchased after 17 March 2020.
- If self-employed, you can spread the wage subsidy over the 12 weeks period even where it is received as a lump sum prior to 31 March.
- An increase in the provisional taxpayer threshold to $5,000.
- Claim 2% depreciation on buildings in the 2021 forecasts
Also you may wish to consider whether employees should be formally instructed to not use their company vehicles during the lock down in order to save on the FBT on motor vehicles.There are some technicalities to work around to save on this FBT liability and it would be easier if the COVID -19 relief measures were extended to specifically exclude the number of days under level 4 lockdown from the FBT calculation.
For more information please refer to our Tax FAQs
Research and Development Credits or Incentives
For the 2020 income year there are two potential reliefs available to generate cash refunds from eligible research and development (R&D) expenditure.
Businesses which have incurred eligible costs on eligible R&D activities in 2020 should evaluate if they can claim relief under either
- The R&D Loss Tax Credit of 28% of the value of a company’s tax loss attributable to R&D expenditure; or
- The R&D Tax Incentive of 15% on eligible R&D expenditure which can also be refunded where the business incurs a tax loss.
R&D Loss Tax Credit
The R&D Loss Tax Credit has been in place for a number of years, and many companies who have been eligible for the credit will be familiar with the process of claim. Briefly the claim only applies to New Zealand resident companies, which incur eligible R&D expenditure and have incurred tax losses arising from the R&D activity. The resulting tax losses can be cashed up with a 28% refund rather than have the tax losses carried forward to offset against future profits.
However the R&D loss tax credit must be repaid when the company makes a profit or a loss recovery event occurs – e.g. a sale of the Intellectual Property created from the R&D activity.
R&D Tax Incentive
The R&D Tax Incentive (RDTI) is different from the R&D Loss Tax Credit and the 2020 income year is the first year of eligible claim. It is not limited to companies and is aimed at incentivising businesses and individuals who perform R&D activities with the sole purpose of resolving scientific or technological uncertainties and who have not received a Callaghan grant in the 2020 year.
Key features include:
- A 15% tax credit on eligible expenditure.
- Minimum eligible R&D expenditure of $50,000 a year.
- Maximum eligible R&D expenditure of $120 million a year.
- Claimed through the filing of a supplementary return to be filed within one month of the income tax return.
Recent COVID 19 relief measures have broadened the refundability of the RDTI credit in the 2019/20 income year. Eligible businesses have a choice between claiming a refund under
- the original “limited refundability” rules which was restricted to certain eligible companies who also met a wage intensity test. To satisfy the wage intensity criteria, 20% or more of their labour costs needed to relate to R&D. The refund was capped at $255,000; or
- the “broader refundability” rules where the corporate eligibility and wage intensity requirement is removed, and the $255,000 cap replaced by a cap based on labour related taxes.
The broader refundability rule will be set as the default for all RDTI claims in the 2019/20 income year, but businesses will have the option of choosing the limited refundability rule if they prefer.
From the 2020/21 income year onwards all businesses will have to use the broader refundability rules.
Under the broader refundability rule the cap will be made up of any labour related taxes (PAYE, ESCT and FBT) paid by the business and by companies the business is controlled by or which sit within the same wholly owned group, and those companies have allocated amount to the business for the purposes of the cap.
For the 2020/21 income year any projects eligible for RDTI also need to be pre-registered with the RDTI team at Inland Revenue for prior approval if a claim is be made in that year.
Lockdown provides a perfect opportunity for a two for one deal where you can work on evaluating the eligibility for RDTI in 2019/20; preparing the necessary workpapers to support the claim and completion of the supplementary return; while identifying potentially eligible projects for 2020/21 which you may need to seek pre-registration.
It makes good business sense to plan ahead for what your business will need to do when we come out of lockdown.
Tidying up last year’s financial statements and your 2020 income tax return while in lock down may ensure the early release of tax refunds, allow plans to be put in place for upcoming provisional tax payments and ensure your resources are free to prioritise the operational needs at that critical time knowing your tax affairs are up to date.