With 31 March only several weeks away some business owners will be thinking about prepaying expenses to reduce taxable profit. But care is needed to ensure that a payment can be deducted for tax purposes.
Purchase of Assets
As mentioned last week, assets with a useful life of more than 12 months are usually capitalised and depreciated unless they are a “low value asset”. Read about that here.
Purchase of Goods for Resale
If your business purchases goods for resale and has an invoice dated 31 March or earlier, then they will be claimed as a tax deduction in the current tax year. However, goods unsold at year end will be closing stock (an asset) at balance date. Goods purchased for resale and unsold at balance date will therefore not reduce taxable profit.
Purchase of Consumable Aids
If your business provides a service and uses consumable aids to provide that service, then prepayment of up to $58,000 can be claimed for tax purposes. For example, a cleaning company that uses cleaning fluids as part of its service (but not for resale to customers).
Prepaying Lease Fees
Generally, prepaying lease of land or buildings is deductible up to $26,000, and no more than 6 months in advance.
Prepaying Insurance
Insurance premiums under an insurance contract can be claimed for up to 12 months prepaid so long as the total amount of such expenditure in the income year in respect of the contract does not exceed $12,000.
Prepaying Advertising
Cost of advertising can be prepaid up to $14,000 and no more than 6 months in advance.
Unlimited deductions
There are some prepayments for which there are unlimited deductions available. These include:
- purchase of stationery
- subscriptions for a newspaper, journal, or other periodical
- motor vehicle registration and drivers licence fees
- postal and courier services, post office box rental
- rates levied to the extent of the amount invoiced on or before balance date
- road user charges
- audit fees
- mandatory accounting costs
Other limited deductions
There are some specific items with no maximum dollar amounts, but the prepayment able to be deducted is limited to a specified number of months. For example, telephone (2 months), plant maintenance (3 months), subscriptions to trade or professional associations so long as the annual fee is no more than $6,000 (12 months).
Summary
The above is general advice only. We recommend reading IRD’s Determination E12 (email us if you would like a copy), or check with Q2 to ensure a prepayment can be claimed for tax purposes in the current tax year.
“The only thing that hurts more than paying an income tax is
not having to pay an income tax.” Thomas Dewar