The end of financial year deadline

As the end of the financial year approaches, it always pays to spend a little extra time examining your financial records and considering ways to increase your after-tax income. There is a high chance that you will find a couple of extra savings from 2019-2020, which can add up to reduce your tax bill by a significant amount. It is also a good time of year to reflect on your financial position, and think about tax minimisation strategies and goals for 2020–21.

Top tax tips for preparing for the end of the financial year:

Write off bad debts

Businesses with outstanding amounts owed, no matter the size, that are unlikely to be recovered in full should consider writing these off as bad debts. Bad debts can be used as a tax deduction, effectively reducing your taxable income for the relevant year.

For a debt to be considered bad, you must have formally written the debt off in your accounts, and be able to prove to Inland Revenue that you have taken reasonable steps to recover the amount.

Pre-pay expenses

By pre-paying for tax-deductible expenses before March 31, you will be able to minimise your tax bill. Some categories of business expenses can be pre-paid without any limitations, meaning that you can claim as much as you like. Examples include stationery, vehicle registration, accounting and auditing fees and postal charges. Most other expense categories have caps that limit the amount that can be claimed in a year.

Split business income

In some circumstances, it may be possible to minimise your tax liability by redistributing the flow of income from your business. For example, if your partner is a low-income earner, it may be advisable for you to split the business income with them. It may also be possible for you to redirect some of your income towards your children.

However, if your family members are employed in your business as wage earners, you should be aware that Inland Revenue may elect to make tax adjustments if they consider the remuneration to be excessive.

Discount reserve

You can claim a deduction for a discount reserve. For example, a discount for speedy payments, if your debtors are traditionally entitled to this discount. In the years following on from the first year that you are allowed, you can claim a discount reserve deduction, adjustments will be made to maintain the discount level at a consistent level.

Trading stock valuation

Trading stock must be valued using a cost valuation method unless the market selling value is lower than the cost. Therefore, to lower the value of your stock before the end of the financial year, you should either physically dispose of it or sell it at market price (if the market price is lower than cost).

Work In Progress (WIP)

It is recommended that on 31 March you assess all the jobs in progress. Make a list of these jobs and add up the costs associated with these jobs (exclusive of GST). The costs will include any stock items used and employee/contractor time on these jobs. These costs are treated as closing Work In Progress as at 31 March and are costs yet to be billed to the customers. These won’t be deductible as an expense at the end of the financial year.

Fixed Asset Schedules

We suggest reviewing your fixed asset registers and assess whether any assets are no longer in use by the business, not working or stolen or disposed of during the year. By writing off these assets (only if they meet the write off criteria) a deduction will be allowed with respect to those assets.

Bonuses and holiday pay

It is possible to claim amounts payable to your employees as a deduction for the current financial year, so long as the full amount is paid to the employee within 63 days of the balance date. Amounts that are paid more than 63 days from the balance date can only be claimed in the following financial year.

Got a tricky tax problem? Call us now on 0800 758 766 to see what we can do to assist. Alternatively, you can email support@geca.co.nz.

Download a pdf of the 2020 year-end tax tips.

The post Year End Checklist 2020 appeared first on GECA Chartered Accountants.

1. Talk to your accountant before year end
Start thinking about tax now. It is best to start planning for tax early. If you are unsure about your particular circumstances, talk to your accountant. They will be able to give you specific advice for your situation. They know what you can claim and what you can’t. And best of all, any fees you pay them are deductible too.

2. Stay on top of your record keeping
At the end of your financial year, make sure that all of your bank reconciliations are up-to-date. Send out all of your sales invoices promptly and make sure your have processed all of your bills to pay.

3. Claiming Expenses
Remember that any expenses you want to claim need to be supported by invoices or receipts. Taking photos and scanning your financial papers throughout the year will save a lot of time. It also makes it easier for your accountant so they don’t need to keep going back to you for receipts etc. And remember, it is a requirement to keep business financial records for seven (7) years so going paperless allows for easier storage. Another tip is to get an external hard drive to back up this information.
It is important to know what expenses you can claim against your taxes, and what you can’t claim. For instance, office supplies like printing and stationery costs are usually 100% claimable, but you can only claim a proportion of your home office costs. Your accountant is always the first person you should ask about this. They are experts about this stuff.
If you use your car for business, you can claim some of the costs. You can claim a proportion of repairs and maintenance, fuel, registration, insurance and depreciation. Keeping a logbook can be helpful, especially if you use the car a lot for business. If you think more than 25% of your travel is for business, you need to substantiate this with a logbook.
If you travel less than 5000 kms per year, you can claim mileage based on your actual travel. Of course, you need to keep a record of the distances travelled and the purpose of the trips. The Inland Revenue publishes an approved mileage rate each year.
It is also possible to claim for depreciation of assets. Purchases over $500 (like a laptop or tablet) that have a useful life of more than one year must be capitalised, not expensed. The capital cost is then written off over the assets useful life. This is called depreciation. The Inland Revenue publishes a comprehensive list of the depreciation rates that apply to different assets.

4. Review Fixed Assets, Inventory and Receivables
Review your list of fixed assets before balance date. Sell any surplus or unused assets that can be sold. Other surplus assets should be written off, along with any assets that have been thrown out or lost.
Review your inventory before balance date for out-of-date or obsolete items. Dispose of any unusable inventory before balance date. Any obsolete inventory can be written off to save you tax.
Review your overdue receivables before the end of your financial year and write-off any bad debts. Be proactive with your invoicing and use a system to get that cash coming in quicker. An online system is a faster and easier method to send out invoices and track them. It also greatly reduces the amount of paperwork and administration time required.

5. Plan Your Expenditure
To reduce your taxable income, purchase any upcoming expenses, like postage or printer ink, before 31 March in order to claim them as early as possible. Prepayments such as insurance can be claimed in full, as long as the total prepaid is less than $12,000.

6. File on Time
Avoid late payment penalties by filing your tax returns on time. If you prepare your own tax return, and your balance date is between 1 October and 31 March, the due date of filing your income tax return is 7 July. If your accountant prepares your tax return, talk to them about when you should give them your records.

7. Accounting Software
Use cloud based accounting software to stay on top of your financial position. The ‘cloud’ is a platform to make data and software accessible online anytime, anywhere, from any device. It’s scalable, cost-effective and easy to use. For small business owners this allows the ability to stay connected to their data and to work remotely.
If you use cloud based accounting software it is easy to share information with your accountant. They see the same data as you and you can both work on your data at the same time. This helps your accountant to help you. You can resolve problems as soon as they happen, rather than leaving them until the end of the financial year.

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