Tax Talk Newsletter Autumn 2019
Get End of Year Right
- If you want to write off a bad debt & claim your loss in the current year, you must do this before your business balance date.
Depending on your system of accounting, this could involve writing something like “debt written off by me on. . . Date signed. . . .” across a copy of an invoice. If you have a more sophisticated system, you will need to make it clear the debt has been written off in time.
If you need to keep a vehicle logbook, remember you need to take a representative three-month period and keep a record of all the running for that time.
There is an alternative. You could record the business running only & note the total number of kilometres travelled for the period. By deduction, the difference would be personal.
You are not permitted to do it the other way round & count just the personal running, because any travel which is overlooked needs to be treated as personal by default. If you forget to record a business trip, you will pay for it yourself. It’s better to try & account for all kms travelled every day to minimise the risk of overlooking a business trip.
If you’re calculating your vehicle running expenses based on the number of kms you have travelled during the year, we will need you to supply that total. Don’t forget to take an odometer reading at the end of the day on 31 March (or equivalent balance date). If you don’t do this the maximum you can claim at the top km rate, currently 76c, is 3,500km whereas if you do keep the opening & closing odometer reading that rate can be used up to 14,000 kms.
If you trade in your vehicle during the year, you will need to keep an odometer reading at the time of sale of the old vehicle & at the time of purchase of the new vehicle.
You are permitted to switch from actual cost to kilometre rate or vice versa whenever you change your vehicle.
This can be done when we prepare your annual accounts, provided we do this within the time the Inland Revenue allows us. Normally, we are allowed until 31 March following balance date to get the tax returns to Inland Revenue for the year.
Now is a good time to tidy up your trading stock. Get rid of anything which has no value. If you’ve got time before balance date, have a sale. Any stock remaining on your shelves at balance date has to be taken into account at cost unless you can prove market value is lower by comparison with other sales outside your business.
If you do maintenance before balance date, you have a tax-deductible cost. Leave until after balance date & your deduction will not be until next year.
Salaries and wages
Any holiday pay, paid out within 63 days of the end of the financial year, may be claimed as a creditor. You can put the amount down as money owing by you at balance date.
Get in Quick to Get Your Invoices Paid
Cash flow is often a problem for small businesses. They could do a lot to improve it. Here are some suggestions about collecting bills:
- Send your invoices as soon as you can. Never wait until the end of the month.
- If it’s a large bill, see if you can get progress payments (include this in your quote).
- Email your invoices. A tradesman did a job worth $15,000. He emailed the bill at 9.34pm and the bill was paid within seven minutes. Many people like to pay quickly. They also like to action their emails quickly. Take advantage of this.
- No law says a person must pay their bill on the 20th of the month following receipt of invoice. It was just a handy convention from many years ago. You can make your terms what you like. Why not make them as short as possible, like “please pay this account within one week of receipt”.
Ensure Donations Above Board
If you donate large sums to charity, you should check to ensure the entity is still approved by Inland Revenue. To find out, see: https://www.ird.govt.nz/donee-organisations/donee-complete-list.html
You can pay donations through your company, but there must be a profit at the end of the year after deducting the donations. Losses resulting from donations paid are not tax deductible.
You can claim school donations, so long as they are not designated for a specific activity such as for your child to go on a school trip.
If your child goes to a state integrated school, you may be asked to make donations to various funds such as a building donations fund. These payments would be OK for claiming the rebate. The important issue is that the child cannot be banned from the school if the parent fails to pay the donation. This is a requirement for a school to be integrated.
For non-integrated schools, the general principle is that any donations made must be voluntary. If it is really in the nature of a fee for attending the school, the rebate is not claimable.
The New Zealand Herald reported recently “the vast majority of parents are not claiming the tax rebate for donations even though they are entitled to it”.
Part of the reason would appear to be many parents are on salaries and don’t have to put in a tax return. They are overlooking their entitlement to the donations rebate.
Plan for Capital Gains Tax
If Capital Gains Tax is introduced (and there is now some debate about this), all assets affected by the tax will have to be valued at the time the new tax starts.
A rental property will be worth more if it has recently been renovated, repainted etc. Other people are going to cotton on to this idea, so expect some difficulty getting tradesmen as the deadline for getting a valuation approaches. You will minimise capital gains tax by maximising the value of your assets at the start of the regime.
You will probably get a better result by using a professional valuer than relying on government valuation.
Expect a stampede to get valuers. They are likely to be overworked. Too much work equals increase in fees. You could get in early and get the valuer to complete his/her job early. It might be a simple matter to update the figures later, without the need for a second site visit.
Capital Gains Tax, if it comes in, is likely to be as wide-ranging as possible and include your business, your boat, your bach and so on. You may need to value hobby assets such stamp collections, art etc.
Above all, documentation is going to be extremely important. Inland Revenue would have the right to ask you how you arrived at the value at the start of CGT and require you to prove it.
Don't Become a Dependent Business
A dependent business is one which relies on one or a few other businesses to remain viable. Trade cycles are such that buoyant times are followed by high unemployment, business failure and a reduction in demand for goods and services. It is at these times dependent businesses can go to the wall. As a rough guide, make sure no more than 20% of your income is dependent on one source.
In the good old days, depending upon your point of view, when interest rates were a lot higher, it paid to transfer money out of a business current account into a savings account. These days, savings accounts offer such abysmal interest, one has to wonder whether keeping them open is worth the hassle. They involve extra accounting and may now be uneconomical to run. It might be time to close them.
The quick snail mail
A telco customer was overcharged. Fearing a long wait on the telephone for a company with a poor reputation for customer service, he sent them a letter because he couldn’t find their email address! Some time later he received a call to resolve the problem. It all ended happily ever after and the total investment in time was only a few minutes. Snail mail could be a quick option when dealing with large organisations who don’t care about how much time you have to wait on the line for them and won’t give you an email address
Can the Spam With a New Email Address
Whenever you sign up to a subscription service or buy something online, it’s likely you’ll be put on a mailing list – whether you like it or not.
Sometimes, your email address will be given to third parties, such as advertisers and marketing agencies. After a while, you’ll be getting invitations, “special” offers and plenty of ways to enhance your life or your body.
If you want to ensure you don’t receive any more (it won’t stop what you already have), one effective way is to create an email account secondary to your main account.
Your main email address will be the one you use for work or to communicate with friends and family. Set up another email address and use it for web activities such as online shopping, booking a hotel or subscribing to a news site.
The second email address won't stop spam from arriving, but those unwanted messages will appear in your secondary email account, rather than your primary one. After a while, you’ll probably ignore it completely.
The beauty of this is it will keep your main inbox free from clutter.
Email providers such as Gmail, Yahoo and Outlook can be used to set up a decoy account for free, following the same process you used to establish your original account.
Retentions in Trust Accounts
If you have a significant amount of money owing to you in the form of retentions by a contracting entity, it would pay to get written confirmation the money has been set aside in a trust account.
You may have noticed a report in the newspaper about Ebert Construction Limited where there was a bookkeeping error and some of the retention money had not been set aside.
As a consequence, the subcontractors were not able to be paid, due to the way the law has been worded.
Important: This is not advice. Clients should not act solely on the basis of the material contained in the Tax Talk Newsletter. Items herein are general comments only and do not constitute nor convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The Tax Talk Newsletter is issued as a helpful guide to our clients and for their private information. Therefore it should be regarded as confidential and should not be made available to any person without our prior approval.