What is 63-day rule
A person is allowed a deduction for the amount spent on employing people. Payment related to employment could be in the form of wage and salary or payment of leaves. Section EA 4 says payment must be made within 63 days after the end of the income year. Any payment not made within 63 days after the of the income year, becomes income of the person for tax purposes. It means deduction is not allowed for the unpaid portion.
Extension of payment period for shareholder-employee
Subsection EA 4(3) extends 63 days rule. For employment income paid to a shareholder-employee, the 63 day period for payment in subsection (1)(b)(i) is extended until the last date by which the person could file a return of income for the income year if the time for filing were extended to its maximum under section 37(5) of the Tax Administration Act 1994.
It means payment to shareholder employee can be made until 31-03 of the next year. Assuming 31st March is end of year date. Once payment had been made the amount can be used as deduction.
Modifying 63 day rule
A new section was inserted EA 4 (1) (b) (ib) on 1-04-2017 for 2017-18 and future years to modify existing 63-day rule. Current rule increases the compliance cost as the person must maintain record of payments made with in 63 days. With the new rule person can choose to apply the existing rule or use new method. Under new method person can claim a deduction for expenditure on employment income paid within the income year. Unpaid portion shall not be allowed as deduction.
The modification is mainly targeted for very small businesses and I believe this is done to fix loose ends in the Act. Majority of business would be keeping track of payments made within 63 days as they would be using payroll software. If, person wants to claim additional deduction they can do so by keeping track of payments made with in 63 days. Else they can do nothing.
{proforms 1}