If we were in the Northern Hemisphere we could call it a “Spring clean” – middle of March. From an accounting and income tax point of view it is important that these housekeeping matters are tidied up before year end. For many that year end is 31 March.
The following are matters you should be looking at now:
- Writing off bad debts – this needs to be actioned in your accounting system to record that any previously recognised income should be reversed. The fact that you may still be trying to recover the money will not affect the write off for accounting purposes. The main thing is that having considered the debt carefully the likelihood of you recovering the money is slim. By writing this debt off your business will not be taxed on the unreceipted income. This is because most businesses are taxed on an income “derived” (or accrual accounting basis) not on income “received” (cash accounting basis).
- Ensure that your invoicing is up to date. This will enable you to identify income “derived” even if you haven’t been paid. But don’t invoice before you need to, say if the job is not yet complete.
- Legal expenditure related to the business is automatically deductible if it doesn’t exceed $10,000 pa. If you are thinking of engaging for legal services right now and you are at that limit consider holding off for two weeks. If the expenditure exceeds $10,000 then you and your accountant will later be spending time determining if the expenditure is deductible or must be capitalized.
- Carry out a stock take. Many firms carry out their stock take early (a week or two before year end), then at the end of the financial year only have to adjust for the movement from the earlier stock take to 31 March. If you hold worthless or expired stock consider removing it from the business before balance date. You may be able to impair the value of this type of stock for accounting purposes if you still hold it, but it may be quicker and easier to dispose of it now instead. You may want to consider gifting this stock to a local charity or shelter – just because it is no longer sellable from your perspective doesn’t mean it is not of value to someone else.
- Journal any accrued liabilities. While many businesses do this in relation to goods and services they have received but not yet been invoiced for, many overlook their greatest liability – employee pay and leave entitlements. If you have accrued your employee leave, and they take that leave within 63 days of the end of the financial year, you can take a tax deduction in the earlier period. For example, Easter falls in the last weekend of March. If you have employees that are taking further time off into April then that leave expense is deductible in March. ANZAC day is Monday 25th April, the school holidays fall in mid to late April – both dates were employees may take leave. If your employees have accrued wages as at 31 March but not payable until April, these are also deductible in March.
- Identify expenditure that is paid early (pre-payments). In certain circumstances that expenditure is deductible when paid, but in some cases a portion of the expense must be added back for deduction in a future year. For example, property rental that is paid more than 1 month in advance is only deductible if the unexpired cost is less than $26,000 and the term is no more than 6 months out from balance date. In another example, telecommunications hire paid early is deductible if not paid more than 2 months in advance regardless of the amount. Whereas, audit fees are deductible if paid regardless of the amount or the period of work it relates to. For stationery, the amount is also unlimited but must be in the possession of the taxpayer by balance date.
- Charitable donations must be paid before year end to receive a deduction in that year. However, if your business has made a loss in the current tax year you will be denied a deduction, so if this is your situation make your donation after year end so that it falls in to the coming year (as long as you make a profit in that year the deduction will be available).
- Check your shareholder current accounts. If they are overdrawn consider whether you can clear the account by a bonus or a dividend. Otherwise the company may have to charge interest on the balance (creating income for the company but probably no tax deduction for the shareholder). The alternative is a fringe benefit liability or a deemed dividend. Note that as shareholder salaries can be determined post balance date you will have additional time to correct the current accounts. However, shareholder salaries are not always available if you normally pay PAYE based wages – so work out which one works for your situation.
- Finally, make sure your company’s imputation account is not in debit. If it is, get an income tax payment made by 31 March to clear the debit. All imputation accounts close on 31 March regardless of the company’s balance date – and a debit at 31 March will result in additional tax to pay, plus penalties and interest.
The end of the financial year is a good time to reflect on what has happened over the last 12 months. But preparing for and anticipating the forthcoming year is more important. You need to capture what you have and improve upon it. If you would like assistance in doing this contact us.