For many businesses, 31 March is an important date because it is the end of their financial year, and it is the last day their accountant has to file their prior year’s tax return. To make the year end process as smooth as possible (at least from a tax perspective), a few “to dos”, along with some tax planning opportunities, have been summarised below.
Year end issues
- Bad debts: bad debts must be written off before the end of the financial year in order to be tax deductible in that year. Points to consider when writing off bad debts are the age of the debts and the likelihood of the debts being collected. If the debts are then considered to be bad, they should be written off to reflect a more accurate picture of the year’s profitability.
- Accruals and provisions: as you accrue and provide for expenditure, think about whether the costs are incurred at balance date. In general, an expense should be deductible if you are definitively committed to the expenditure at year end and can reasonably estimate the amount. There are exceptions though, for example, accruals for employment expenditure (such as annual leave) are tax deductible if they are incurred and are paid out in the current year or within 63 days after balance date.
- Charitable donations: these are fully deductible up to the company’s net income for the year, provided that they are paid in the financial year. So if a donation is planned before the end of the year, it may be worth writing the cheque sooner rather than later. On the other hand, if you have made a loss for the year, but are expecting a profit next year, it could be beneficial to wait until the new financial year.
- Shareholder current accounts: if the company is owed money by shareholders, consider paying commercially justifiable shareholder-employee salaries or paying a dividend to settle the debts. FBT or deemed dividend issues may arise if this is not carried out. Depending on the company, there are some extra timing rules which can apply here.
- Legal expenses: business-related legal fees are deductible, provided total legal costs for the year are $10,000 or less. If you are nearing this threshold and the legal work is not urgent, consideration could be given to postponing it.
- Asset purchases: these may need to be reviewed to ensure that assets that cost more than $500 are capitalised for tax purposes. This can often be overlooked especially where such assets are expensed for accounting purposes.
- Entertainment expenditure: businesses will need to ensure that entertainment expenditure is analysed to determine if the expenditure is 50% or 100% deductible. A GST adjustment will need to be made for entertainment that is only 50% deductible.
- Closing stock: if closing stock is held that is worthless, an accounting impairment might be made. This type of adjustment is non-deductible for tax purposes. However, if market data can be prepared that reflects the stock as having no value, the adjustment can be included on the basis that stock is being valued under the “market selling value” method.
All information in this newsletter is to the best of the authors’ knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information.