Financial year-end can be daunting, particularly for business owners that simply lack the time to pre-plan and leverage opportunities to reduce their tax exposure.
In the lead up to 31 March, we’ve compiled below a list of key tax requirements that you must comply with to avoid penalties, and others that present an opportunity to reduce your tax liability and improve cash flow into the new financial year.
Trading stock (excluding livestock) on hand must be valued at cost or market selling value, depending on which is lower at year-end. Any changes with the valuation approach should be disclosed accordingly. General provisions for obsolete stock or stock write downs are not deductible for tax purposes. Therefore, it is important to perform a stock take and to make sure that all obsolete stock is physically disposed of or written down to its net realisable value before year-end.
A taxpayer with a turnover of $1.3 million or less during the current financial year is allowed to value their closing stock at the opening stock value, provided the total amount of closing stock can be reasonably estimated to be below $10,000.
Writing off bad debts
Bad debts must be physically written off from the debtor’s ledger before the balance date for them to be claimed as tax deductions, and this may allow you to recover previous GST payments. Recovery actions and sufficient information to support the debt as bad are required by the Inland Revenue Department (IRD).
Deducting employee-related expenses
Amounts accrued at balance date for employee related expenses such as holiday pay, long service, sick pay and bonuses, can only be deducted in the current year if they are paid out within 63 days of year-end (i.e. for a 31 March balance date, the 63rd day will be 2 June). Therefore, we recommend you pay bonuses to your staff or encourage them to take annual leave within this timeframe, where possible.
Imputation credit account and dividends
The current imputation year for your company is 1 April 2021 to 31 March 2022. Regardless of your balance date, it is important to ensure your imputation credit account balance is not in debit on 31 March 2022. A penalty of 10% will be imposed on any debit balance at 31 March.
Filing your Fringe Benefit Tax (FBT) return
The filing and payment due date for the fourth quarter FBT return is 31 May 2022. It is important to note that the election to use the alternate rate should be made while filing this March quarter return.
FBT can become overwhelming, so it’s important you contact a chartered accountant if you need calculation assistance as you could end up with a large, unexpected bill due to tax underpayments.
Fringe benefit tax may apply to the next item as well.
Record your entertainment expenses throughout the year
Not all business-related entertainment expenses are 100% tax deductible. Therefore, it is fundamental you record how and why these expenses were incurred to make sure they are correctly accounted for and the right amount is deducted.
GST adjustments are also required with respect to the non-deductible amounts.
Rules around deducting prepayments
Prepayments are the expenses that have been paid during the current tax year but relate to a future period. Prepayments are also referred to as prepaid expenditure. Generally, the unexpired portion of prepaid expenditure/prepayments is not deductible in the current year.
However, under current tax rules, there are some exceptions available provided certain criteria are satisfied (i.e. whether the expenses have been claimed for financial reporting purposes, and the period of the unexpired portion including the prepaid amount are within the prescribed threshold).
Speak to a chartered accountant to understand whether any of your prepayments can be fully deducted in the current tax year.
Review the accuracy of your fixed assets registers
Review the accuracy of your fixed asset registers by year-end. Your business will be affected badly if you do not retain accurate fixed asset registers. An accurate fixed asset register is a wonderful asset tracking tool that can be utilised to improve profitability and decision making and to reduce money and time wastage in your business. Under certain circumstances, assets written off are deductible for tax purposes.
A fixed asset can be written off if it meets the following requirements:
- The asset is no longer used in your business, and
- The asset is not intended to be used in the future, and
- The disposal cost of the asset would be higher than disposal proceeds, and
- The asset is neither a building nor a pooled asset.
As part of the COVID tax relief, an instant write-off for assets costing $5,000 or less was allowed for the period from 17 March 2020 to 16 March 2021. Starting 17 March 2021, the amount was decreased to $1,000.
Complete your loss offsets and subvention payments by 31 March
Group loss offsets and subvention payments for the 2021 financial year are required to be completed by 31 March 2022. By this date, an election notice with Inland Revenue must have been filed by the loss company and the subvention payment must have been paid to the loss company.
Speak with a William Buck advisor or your chartered accountant before year-end if your company has incurred tax losses.
Reassess your provisional tax for the year-end 2022
Provisional tax in 2022 is calculated on the standard basis and is generally based on your 2021 results. If you believe your 2022 results will be significantly different from the previous year, we recommend you contact a William Buck advisor or your chartered accountant to discuss the need for a voluntary payment or if you wish to estimate your earnings.
Treatment of Goods and Services Tax (GST)
A key part of your year-end process should be reconciliation between your business’s GST return and the balance of the GST account. GST reconciliation is also generally requested as part of Inland Revenue’s audit procedures.
We recommend you undertake a GST review to identify any potential system/software issues if there are unreconciled discrepancies.
Through following these processes and ensuring all requirements are met by their respective deadlines, you will go a long way to avoiding penalties and ensuring compliance.
To gain a better understanding of any of the above points or for advice on how to approach tax time, contact your local William Buck Advisor.