How to Minimise Your Corporate Tax Liability
Minimising corporate tax liability is a crucial aspect of financial management for any business. By understanding the available deductions, credits, and strategic planning opportunities, companies can significantly reduce their tax burden. Here’s a comprehensive guide tailored for the local market on how to effectively manage and minimise your corporate tax liability.
Understanding Corporate Tax
Corporate tax is levied on the profits of a corporation. For most companies, the tax rate is 28%, while Māori authorities benefit from a lower rate of 17.5%. Understanding the tax structure and the types of deductions available is the first step in managing your tax liability effectively.
Key Strategies to Minimise Corporate Tax Liability
1. Claim All Eligible Business Expenses
Many business expenses are deductible, reducing your taxable income and, consequently, your tax liability. Here are some common deductible expenses:
- Employee Salaries and Benefits: Salaries, bonuses, and benefits such as health insurance and retirement contributions are deductible.
- Operating Expenses: Costs related to running your business, including rent, utilities, office supplies, and maintenance, are deductible.
- Professional Services: Fees for legal, accounting, and consulting services can be claimed as business expenses.
- Marketing and Advertising: Costs associated with marketing and advertising your business are deductible.
- Travel Expenses: Business-related travel expenses, including accommodation, meals, and transportation, can be deducted, provided they are properly documented.
2. Depreciation of Assets
Depreciation allows you to spread the cost of an asset over its useful life, reducing your taxable income each year. Ensure you claim depreciation on all eligible assets, such as machinery, vehicles, and office equipment.
- Commercial Buildings: Note that tax depreciation deductions for commercial buildings with an estimated useful life of 50 years or more have been removed from the start of the 2024/25 income year.
3. Utilise Tax Credits and Incentives
Several tax credits and incentives can help reduce your corporate tax liability:
- Research and Development (R&D) Tax Incentive: Businesses spending on eligible R&D activities can claim a tax credit of 15% of the eligible expenditure, up to $120 million. Ensure your R&D activities meet the criteria set by Inland Revenue.
- Charitable Donations: Donations to registered charities can be deducted from your taxable income. This not only supports good causes but also reduces your tax bill.
4. Optimise Your Business Structure
Choosing the right business structure can have significant tax implications. For example, operating as a company rather than a sole trader or partnership can provide benefits such as limited liability and the ability to retain profits within the company for future growth.
- Reorganise Your Business Structure: Regularly review and, if necessary, reorganise your business structure to ensure it remains tax-efficient. This could involve setting up subsidiaries or restructuring ownership to take advantage of lower tax rates or additional deductions.
5. Plan for Major Transactions
Strategic planning for major transactions can help minimise tax liability:
- Timing of Purchases: Plan significant capital expenditures towards the end of the financial year to maximise depreciation deductions.
- Profit Extraction: Use tax-efficient methods to extract profits from your business, such as dividends, which can be offset by imputation credits to avoid double taxation.
6. Manage Losses Effectively
Utilise tax loss carry-forwards and carry-backs to offset taxable income in profitable years. This can smooth out tax liabilities over time and reduce the overall tax burden.
- Claiming Loss Relief: Efficiently claim loss relief by offsetting losses against previous or future profits to claim a tax refund or reduce future tax liabilities.
Staying Compliant and Informed
1. Keep Accurate Records
Maintaining detailed and accurate records is essential for claiming deductions and credits. Ensure all expenses are well-documented with receipts and invoices, and keep these records for at least seven years as required by Inland Revenue.
2. Stay Updated with Tax Law Changes
Tax laws and regulations can change frequently. Stay informed about the latest developments to ensure compliance and take advantage of new opportunities to minimise tax liability. For instance, recent changes include the reintroduction of interest deductibility for residential properties and adjustments to the bright-line test for property sales.
3. Consult with Tax Professionals
Engaging with tax professionals can provide valuable insights and ensure that your tax strategy is both effective and compliant. Tax advisors can help identify additional deductions, optimise your business structure, and navigate complex tax regulations.
Minimising corporate tax liability requires a proactive approach, including understanding eligible deductions, utilising tax credits, optimising your business structure, and planning for major transactions. By staying informed about tax law changes and maintaining accurate records, businesses can effectively manage their tax obligations and maximise their profitability. Regular consultation with tax professionals can further enhance your tax strategy, ensuring you take full advantage of all available opportunities to reduce your tax burden.