Happy New Year…

Happy New Year…

Well almost anyway – the new financial year for most businesses kicks off on 1 April so accountants around the country will be rubbing their hands with glee as they start to gear up for their busy period. For the rest of the country though, this date is a dark cloud on the calendar - a signal that its time to start counting stock and getting the books together to work out our tax positions.

But is this really the way to approach it? What would happen if we started to think about opportunities that present themselves rather than thinking that year end is just a drag?

I for one am in no doubt that 2011/12 has been a difficult year and unlike previous years, there are unfortunately no tax cuts to look forward. So with the end in sight I reckon that we’re all on the lookout for ways to better our position. If you’re remotely interested in paying less tax or getting some tax back, even if you’re simply a salary or wage earner then read on.

1. Prepaid expenses. One of the most effective tax deferral strategies is to prepay some expenses, such as insurances and software licences for example, for the following financial year. While there are restrictions on some expenses in terms of the limit that can be claimed businesses should review which expenses can be prepaid and whether they have adequate cash flow to take advantage of this strategy. For individuals, remember you can claim income protection or loss of earnings insurance and get some tax back!

2. 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!

3. Ditch the dodgy assets. Assets may be written off and a deduction allowed if:
a. They are no longer in use; and
b. Have become redundant with no potential for future use
c. The cost of the defunct asset is more than its disposal value.
If you’re thinking of the purchasing new assets then hold off until the very last second and you’ll be in a position to claim a whole month’s depreciation. If you’re selling an asset and are expecting to make a loss then get rid of it before 31 March. On the other hand if you think there is money to be made on the sale then defer until after 31 March.

4. Bad debt’s redeeming quality. If you have a debtor that goes bad, you’re entitled to claim a bad debt deduction. However, to prove that the debt is indeed bad, you must highlight attempts to collect the debt, such as a log of phone calls and sending out demand notices. The status of the debtor can also provide evidence, for example are they in liquidation or receivership?

To claim a tax deduction, any debt must be written off in your accounting system prior to 31 March (if this is your balance date). Adjustment for any GST previously returned to the IRD will also need to be made. If all goes well and some of that debt is recovered, then you must remember to identify that as ‘income.’

5. Give and get back. Two points to note. Firstly, 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. Secondly, wages paid for holidays and bonuses earned during the 2012 year, taken and paid within 63 days i.e. before 2 June 2012, are tax deductible for the 31 March 2012 income tax year.

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 claim back a 1/3 of the donation 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.

6. 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.

My advice: It’s all about timing. Think about the timing of transactions. Rent, advertising, travel, stationery etc, can all be managed to get the best tax result. Small businesses shouldn't overlook the cash flow benefits that come with deferring their tax obligations. In short, take the pressure off by paying less tax now - enough said.

What about next year? 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, inject some timeframes, assign responsibilities and see you through D-Day.

* 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.
About the Author
Matthew Bellingham is CEO of Hayes Knight NZ Limited Chartered Accountants.
Matthew is also Chair of the New Zealand Institute of Chartered Accountants’ Public Practice Advisory Group.

ENDS

www.hayesknight.co.nz

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