Welcome to this week’s 3 in 3 at 3, where we get you the three key things you need to know for your business in three minutes or less at three o’clock on a Monday.
Thing One: Buying a New Vehicle to Save Tax
This is a conversation we have a few dozen times at this time of year with clients. Those with some extra cash or who have been seduced by a car dealers promotions, really want a shiny new car.
So, the first myth we have to bust here, is that buying a vehicle is not going to reduce your tax bill. Nine times out of ten, what we actually see is that buying a new vehicle at this time increases your tax bill. And that’s generally because you’re trading in your old work vehicle for the new work vehicle.
What that’s going to do, is it’s going to mean that you lose the depreciation for the whole financial year for the trade in vehicle and the new vehicle is going to start depreciating, but it’s only going to depreciate for the next week and a half or so. So you’re only going to get a teeny tiny little amount of tax depreciation.
So overall, you’re likely to be more profitable and pay more tax if you’re trading in a vehicle to buy a new one now. So probably worthwhile putting that off for a week or so.
Thing Two: Buy Low Value Assets to Save Tax
If you need to, now is the time to buy low-value assets (under $1,000) to fully expense them, reduce you’re profit and pay less tax.
So a low value asset is anything that’s a thousand dollars or less, and those are instantly expensed. So straight away those things are an expense on your P& L. They reduce your net profit and reduce your tax bill. But the flow on of that is obviously you have to pay up to a thousand bucks to buy something to then save just a couple hundred dollars worth of tax. So if you’re looking at putting yourself in the best possible position, is it really worth it?
It’s only worth it if you really need to buy those things. So if you’ve got something that you really need to buy that’s a thousand bucks or less, then go ahead and buy those for the business. But if you don’t, you’re really just spending 100% of the money out of your back pocket to try and save yourself a couple hundred dollars worth of tax.
In my opinion, you’ll be better off paying the couple hundred dollars worth of tax and keeping the seven or 800 bucks in your back pocket, especially if the things you’re buying are things you don’t really need.
Thing Three: The Accounting Income Method for Provisional Tax
For the year ahead, it’s probably worthwhile considering going on the accounting income method for your provisional tax if you do struggle with your tax planning and your tax budgeting.
What that means is that every single time you file a GST return, You also file an AIM return, which is the Accounting Income Method for Provisional Tax Calculation. So what that’s doing is it’s taking a snapshot of exactly how your business is performing in the year to date, filing that through to the IRD taking into account things like your shareholder salaries and distributions and all that sort of stuff, and you pay the exact tax that you need to pay based on how you’ve actually performed in the year to date.
So that’s a really good option for people who want to make sure that they are paying exactly the amount of tax that they need to pay and aren’t going to get any big lumpy surprises with the traditional three big installments of provisional tax.
So that’s three key things there for you to consider this week. Tune in next week where we’ll be doing a further roundup of the extra things that you need to be doing in the year ahead.