Preparing for tax time can be daunting – especially as a small business owner when it adds to your already exhaustive To Do list. At William Buck, we’ve found that many small business owners can become so focused on day-to-day operations of running their business that they leave their End of Financial Year (EOFY) obligations to the very last minute, creating even more stress! That’s why we’ve put together some do’s and don’ts when preparing for tax time.
Ensure year-round record-keeping
Record-keeping is a year-round ‘do’ and can make all the difference come tax time. Submit each transaction into your accounting system and separate personal from business items. The more you keep on top of things throughout the year, the less you’ll need to prepare in the immediate leadup to EOFY. Similarly, if you’re practicing optimal record-keeping, you’ll find it becomes easier each year. This is due to familiarisation as well as tech improvements.
Sumire Tachibana, Manager, Business Advisory Services at William Buck said using intuitive accounting software like Xero, cloud folders like Google Drive and Dropbox, and tenancy management software will increase efficiencies and free up time for you to spend on improving your product or service, speaking with customers and strategising.
“These programs also enable document sharing with your accountants and other parties so that changes can be made in real time and document control is maintained,” said Sumire.
Which introduces our next tip…
Invest in software training
Due to time constraints, small business owners aren’t always across the full capacity of their accounting package. While the constant evolution of accounting software has simplified the bookkeeping task for small business owners, being unable to use the software and or take advantage of all its functions can create inefficiencies.
Set some time aside each year for training and assess whether your accounting package is the right one for you.
Keep abreast with legislative changes throughout the year
Staying across changes to New Zealand’s tax laws means you’re much more likely to comply with all requirements at tax time and won’t be faced with any nasty penalties.
This is especially important in 2021 due to the many stimulus measures introduced last year to cushion New Zealanders from the impacts of COVID-19, and the impacts these might have to your documentation come tax time.
Other changes this year, which take effect on 1 April, include:
- The introduction of a new 39% personal tax rate on income above $180,000
- A new Fringe Benefits Tax rate of nearly 64% for all-inclusive pay above $129,681, and
- An Employer Superannuation Contribution Tax (ESCT) rate of 39% on super contributions for employees whose ESCT rate threshold amount exceeds $216,000.
Remember that Income Tax has a broad tax avoidance disclosure provision. If you restructure your entities for the purpose of trying to save paying tax at the highest rate of 39%, that is very likely to fall under the definition of “tax avoidance”. Talk to William Buck or your chartered accountant for advice if you feel there is a need to restructure your business affairs.
The new Trust Act 2019 is now in force and additional disclosure requirements will apply from 1 April 2021. Therefore, it’s recommended you review your trust deed and reassess your purposes for having a trust with your accountant and lawyer.
Write off expenses to maximise tax deductions
To reduce your tax liability and maximise deductions at tax time, it’s important to review your debtors, inventories and fixed assets, and accordingly write-off any:
- Debts that are not recoverable
- Stocks that have become obsolete
- Assets no longer able to generate revenue.
Many expenses can be written off, as long as they have a legitimate purpose within the business. Commercial rent, equipment and business travel are all able to be written off.
It’s also important to note the changes to legislation governing write-offs. Due to the impacts of the pandemic, the Government last year announced the ability to take an immediate deduction for assets up to $5,000. However, this threshold will reduce to $1,000 on 17 March 2021. Prior to the pandemic, the threshold sat at $500.
Don’t overlook key tax due dates
Due to heavy workloads and competing priorities, small business owners sometimes fail to prioritise their tax obligations. However, it’s highly important to prioritise these obligations or you could be hit with Inland Revenue penalties and use of money interest. Non-compliance can also flag you with the IRD for audit or review.
Contact a William Buck advisor or your chartered accountant to understand your tax obligations and prioritise key due dates. Advisers should be able to assist with entering an instalment arrangement with the IRD (if required).
Don’t exercise inadequate maintenance of financial records
As already noted, it’s important to keep up with your record-keeping year-round. But it’s also important to do so correctly. Proper record-keeping provides an accurate and reliable financial position of a business, enabling the business owner to determine how it’s performing and identifying opportunities to improve. Jayesh Kumar, Director of Tax Services said the following should also be considered:
- Lock all accounts relating to the financial year so that date remains accurate, ensuring easy transition into the new financial year, and
- Create a separate copy of the accounts and back it up (print key reports like P&L, Balance Sheet and general ledger listing for the financial year and store them securely).
Don’t Ignore the importance of investing in expert assistance
We’re all looking at ways to minimise our expenses post pandemic but cutting costs on advisory services is highly inadvisable. Simply do not make an important business decision without consulting a professional. This could result in missed opportunities, non-compliance, a high tax bill or increased commercial risk.
Do not overdraw!
Finally, and this is a big one, if you have an ordinary company and you take money out of the business, make sure the net position of funds introduced less any funds you withdrew is not overdrawn.
You might be inclined to label the drawings as a “loan” and say that it’s not your money, however, unless you charge interest on the loan at IRD prescribed rates, it will deem to have been paid by you as “dividends”. A deemed dividend scenario has unfavourable tax consequences and charging interest can cause additional taxable income for the company. The best way to avoid this is to ensure the money you remove from the company is taxed as a PAYE salary or a shareholder salary that you declare at EOFY.
For more information on any of the above or assistance preparing your tax, contact your local William Buck advisor.