31 March is just around the corner once again meaning year end for those with a standard 31 March balance date. There are a number of tax and accounting issues that need to be considered and, if necessary, dealt with prior to the end of the tax year or close to the end of the tax year. We provide a brief summary of these below. However, please contact us to discuss if you have any questions about the issues raised.
Where you have debts that have become “bad” during the income year, you are able to claim a deduction in the current income year provided that the debt has physically been written out of your debtors ledger prior to year end.
In order to judge a debt as “bad” there must be no reasonably likelihood of the amount being paid. Before a debt can be considered “bad” and a deduction claimed in respect of it you must have made adequate attempt to recover the debt. Records of these efforts must be kept along with a summary of why you think there is no reasonably likelihood of the debt being recoverable in the future.
If you think there is a possibility that you may have some unrecoverable debtors in your ledger we recommend that you review the ledger prior to year end and that appropriate documentation be assembled to support a deduction. The debts identified as bad and that have the necessary supporting documentation to support the claim should be written out of your accounting system by an authorised person.
Valuation of Trading Stock
Generally, for the purposes of year end calculations trading stock must be valued at cost (excluding GST for GST registered persons). However, where it can be substantiated that the value of the stock at year end is less than the cost price, it may be possible to use the market value of the stock instead.
We note that if you are a small business with stock on hand of less than $10,000 and an annual turnover of less than $1.3m, you are able to use an estimate instead of a valuation.
Where employee remuneration has been incurred during the year, a deduction is only allowed in respect of this if the remuneration is actually paid to the employee within 63 days of balance date. This means for a deduction to be allowed in the current year in respect of current year employee remuneration incurred it must physically be paid before 2 June 2017.
Where you have paid expenses in the current year that relate partially to the next financial year these will generally be apportioned between the portion which relates to the current year and the portion that relates to next year. However, certain expenses do not require apportionment and may be able to be deducted in their entirety in the current year. There are various expenses for which this is a possibility, each with its own limits. We are happy to discuss any specific prepayments with you.
Fixed Asset Schedules
It is important that you have an up to date fixed asset register at year end. In some circumstances assets may be written out of the fixed asset register and a deduction allowed in respect the assets. The following criteria must be met:
- The asset must no longer be used by the business; and
- There is no future intention to use the asset in the business; and
- The cost of disposing of the asset is greater than its disposal value.
We recommend reviewing your fixed asset registers and assessing whether any assets would be eligible for write-off. It is also timely to perform a review of the year’s repairs and maintenance expenditure for the year to ensure that all expenditure has been claimed correctly and nothing that is actually capital expenditure is being claimed as a deduction.
Motor Vehicle Adjustment
Where a business vehicle has been used for private use, FBT is payable in respect of this. However, instead of paying FBT in respect of the private use it is possible to make an adjustment for the value of the private use to a shareholder current account. This calculation and the journal should be recorded in your accounting system prior to year end.
Entertainment expenditure must be reviewed in order to determine whether it is 100% deductible or subject to the 50% deducible entertainment rules. Where entertainment is determined to be 50% deductible a GST adjustment is required in respect of this.
Charitable donations made to approved organisations are fully deductible to companies provided that the donations do not exceed net income and that they are paid during the financial year. If you have significant taxable income and had planned a sizeable donation later in the year it is worth considering whether you should pay it before year end. Alternatively, if you have a taxable loss in the current year it is worth considering waiting until next year to make the donation if it is possible you may have taxable income next year.
Special Tax Codes
Where salary and wage earners receive a large refund or tax bill consistently each year it is possible to apply to the IRD for a special tax code. For example, this would be of benefit where a salary and wage earner had large losses from previous business activities. In the case of a taxpayer with losses this allows them to enjoy the benefit of the refund during the income year as opposed to waiting until the income year has finished in order to apply for the refund.
When a special tax rate is obtained you provide this to your employer and they will adjust the amount of tax that is deducted from your salary or wages accordingly. Special tax codes need to be applied for every year. Please contact us if you think you could benefit from a special tax code.
Link to Client Checklists
On our website we have end of year checklists for both individuals and business clients that make the year end process, as well as making sure you provide us with the information we need to prepare your accounts, easier to navigate.