By applying the 63 day Rule for Holiday paid accrued, bonuses and Directors fees paid you can reduce your terminal and provisional tax bill.
Come the end of the financial year it is worth looking at what Holiday pay has accrued that has not been paid out. The reason to get your head around this is that any of that holiday pay that is paid out within 63 days being 9 weeks of the end of the financial year you can claim in the current year. The logic being this holiday pay liability relates to the current year. For business owners on the payroll you may wish to plan your paid leave payments to be paid between the 1 April and the 3 June.
Let’s say you are on a $120,000 salary and you have accrued 4 weeks leave by the 31 March and you then pay this out in April you could claim the accrued holiday pay of $9,230 in the current year reducing your current tax bill by $2,584.62 (Assumed tax rate of 28%) and the provisional tax for the next year by $2,972.31(Using the IRD standard uplift method to calculate your provisional tax).
The 63 Day rule also applies to Directors fees which is handy to know if you have an exceptionally good year and are looking at a jump in profits and tax. If you declare a Directors fee which you pay via the payroll deducting PAYE or if the Director is not a payroll employee deduct withholding tax typically at 20%. When the directors fee is paid out within 63 days of the end of the financial year the company claims the directors fee as an expense in the current year and the directors fee shows as income for the Director in the following year. Effectively you are moving some of this year’s profits to the next year.
The 63 day rule also applies to bonuses for employees.
Next week see how you could provide tax exempt bonuses to employees.
Next week # TAXtipNZ #7 FBT exemptions – Employee Gifts and transport
