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Make tax time less taxing

For many, 31 March is the end of the financial year. Often it sneaks up quickly, leaving a lot of last-minute work to do. Taking the right steps ahead of time, however, could save a great deal of time, stress and even some money.

As one of life’s great constants, tax, needs to be on a business owner’s mind year-round, and the end of the financial year is no exception. Tax payments due in the two months following 31 March include:

  • residual income tax for the previous year – due 7 April (for taxpayers who have got time extensions through their accountants)
  • the third provisional tax payment – due 7 May
  • GST for the period ending March 2020 – due 7 May.

The lead up to financial year-end provides the perfect opportunity to speak to your accountant about the issue of tax – in particular, whether you have paid enough.

Avoid penalties

As the IRD charges companies 8.35% interest on residual income tax amounts higher than $2,500, it’s critical to ensure you have paid enough tax before it’s too late.

For those operating as sole traders, or in partnerships in their first year of trading, a voluntary tax payment before 31 March can provide a much-needed discount on any terminal tax payment that may be due.

The IRD charges penalties and interest for any non-payments on provisional tax dates, where it deems payments should have been made.

Therefore, even if you pay the full amount of provisional tax on 7 May that you should have paid, but you paid an instalment late during the year, the IRD will still charge non-payment penalties and use-of-money interest.

A way to avoid this is through a Tax Pooling system, where you ‘purchase’ your tax at a lower interest rate in order to avoid these penalties.

This is something you should discuss with your accountant, particularly if you operate in a seasonal industry, or if you have won contracts that have significantly increased your bottom line during the financial year.

Unpaid invoices

Have you been having problems with collecting payments from some of your debtors during the year?

If so, a quick review of your debtor ledger to assess how straightforward the debt recovery process will be is an important part of the year-end process.

The IRD allows for tax deductions of uncollectible amounts – or ‘bad debts’ – only if they are removed from your debtor ledger before the end of the financial year.

These removals may be reversed if the debt is unexpectedly collected at a later date. However, these recoveries need to be included as fully assessable income for tax purposes.

Fixed assets

Does your fixed asset schedule include any work-related equipment that is broken, obsolete or has been replaced during the period?

If so, these should be removed from your fixed asset schedule, for which a tax deduction amounting to the written down value (cost less accumulated depreciation) can be claimed.

Bonuses and holiday pay

Have you paid, or do you plan to pay, any bonuses for the 2020 financial year?

Employee benefits such as holiday pay and bonuses owing at 31 March can be claimed for tax purposes, if paid by 2 June (within 63 days of balance date).

Bonuses must be finalised before 31 March in order to be claimed. Bonuses dependent on conditions satisfied after this date cannot be claimed.

Final note

While we’ve highlighted a number of points to consider, there are many other areas that business owners need to focus on in the run-in to year-end.

Balance date can approach very quickly, but by taking a step back from your day-to-day work and looking at the numbers, you can save yourself time and money.

Find out if an Open for Business loan from Heartland Bank could help you manage tax time.

Lending criteria, fees and charges apply.

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