For many the 1st of April is a dark cloud on the calendar - a signal that it's time to start counting stock and getting the books together to work out our tax positions. But the end of year process need not be a painful one!
If you usually dread the 31 March rigmarole, I'd urge you to approach this year with a fresh attitude. Bellingham Wallace is all about making a positive difference; so with our clients we use the end of year process to uncover opportunities that were undetectable earlier in the year. We also see it as the perfect time to test the status quo and, through fresh thinking, ensure that you and your business are well positioned and ready to enter the new financial year guns blazing. Whether your interest lies in minimising your tax bill, getting good reporting data or simply streamlining your accounting and finance systems, then read on!
- File your return on time. We see countless examples of wasted money due to penalties and interest. File your return early and take advantage of a refund if it is due, or at the very least avoid the interest charges. Remember - this also applies to salary and wage earners. Just because you're not required to file a return doesn't mean that you shouldn't file a return. Many people are owed tax refunds but they simply fail to file which means it stays in the government coffers. There is no need to go to an accountant or a tax refund specialist - simply go to the IRD website and complete the personal tax summary calculator. Best of all - its free!
- Look at Accruals. Remember that certain rules apply for holiday pay and bonuses accrued, and that these need to be paid within 63 days of balance date in order for a deduction to be allowed. You may want to look at whether any bonuses can be paid out to staff within this timeframe so as the deduction can be claimed in the current year.
- Ditch the dodgy assets. Assets may be written off and a deduction allowed if: - They are no longer in use; and - Have become redundant with no potential for future use; and - The cost of the defunct asset is more than its disposal value. The end of the financial year marks a good opportunity to review assets and ensure that your fixed asset register is accurate and up-to-date.
- Give and get back. The 5% deduction limit on donations made by companies has been removed and all companies are now eligible for a donation deduction. The amount of the deduction is only limited by the level of the company's net income. If you're an employee, then the level of donations is only limited by your amount of income. So keep all of those receipts for donations over $5 and look forward to claiming back a 1/3 of the donations made. There are also some special rules around receipts for Christchurch donations which are a little less onerous. Details are available on the IRD website, or contact your accountant.
- Ditch the dead weight*. Stock value can have an impact on the taxable profit position of any business. I strongly encourage a physical stock take (as of 31 March). Scrap any obsolete or damaged stock. If it has lost its value then it may only be taking up space. You also have the option with all of your trading to stock to value it at the lower of cost, market, or replacement value. You can make this choice on your stock item by item. You don't have to use the same method for all of your stock, but you do need the records to prove what you've done.
- Get your systems working for you. There are some pretty amazing accounting systems out there these days for small to medium sized businesses, and year end is a good time to evaluate whether you are getting the most out of yours. Having the right system and knowing how to use it can mean not only having useful and timely information during the year, but also streamlining your end of year processes by allowing your accountant easy access to your files and getting information inputted quickly and easily. With a future focus on efficiency, and current proposals to simplify the taxation of small businesses we believe that a good, well implemented system can't be beat for making your end of year process as stress free as possible.
- Review your R&M. The Inland Revenue department has been clamping down on repairs and maintenance deductions, and while I'm sure we all want to maximise our tax deductions it's important that attention be paid to ensure the deductions claimed are fair and reasonable, and within the IRD guidelines. In particular, carefully check all repairs and maintenance over $500 and have these invoices ready for your accountant to review.
- Declare dividends. If you've been drawing money out of the business during the year then you may want to consider declaring a dividend before the end of the financial year. If the shareholders' account goes into overdraft, then there will be deemed dividend issues resulting in interest penalties on the overdrawn current account from the company. This creates unnecessary income that you are obliged to pay tax on. Remember that if you declare a dividend in March, dividend withholding tax will be due on 20 April.
- Write-off bad debts. If you have any old debts hanging over your accounts receivable then now's the time to consider writing them off. If you are unlikely to get paid then writing them off before the end of the financial year at least makes them tax deductible.
My advice is to approach the end of the financial year like any other project and project manage it. Any good accountant will be able to sit-down with you to go through everything that needs to be done. But instead of simply getting through the end of year, let's try to take something away from it that can help improve our business processes and make next year even better!
* Businesses can value closing stock at the opening stock value where turnover has been less than $1.3 million per year and the closing stock can be reasonably estimated to be less than $10,000
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