Financial Year End Procedures
End of year procedures need to be carried out to prepare your company file for the coming year. By closing the year in your company file, you are effectively bringing the company file up to date.
These include any adjustments you need to make to your company file so that it agrees with your accountants’ final records before you start a new year.
Review Your Debtors/Accounts Receivable
Companies will pay tax on all sales including those in your debtor’s ledger (i.e. those that owe you money but haven’t paid you by 31 March). Do any of your debtors need to be written off? Bad debts must be written out of the debtor’s ledger prior to balance date if they are to qualify for a tax deduction, and this may enable you to recover GST previously paid. The IRD require sufficient information supporting the debt as bad. Please contact us if you require assistance with this.
Employee Holiday Pay & Bonuses
Accrued holiday pay and bonuses are only a deductible expense if they are paid out within 63 days of balance date (i.e. by 2nd June for March balance dates). Therefore, if staff can be encouraged to take leave prior to 2nd June a deduction can be claimed for tax purposes.
At the end of each financial year, you are required to count and value your stock on hand. Now is the time to discount slow moving stock and dispose the obsolete stock to obtain a tax deduction.
Review your companies Fixed Asset Register to identify assets that may be scrapped or that are no longer used. In certain cases it is possible to claim a tax deduction for assets written off.
Assets can be written off if they are no longer used but have not been disposed of provided:
- The asset is no longer used by you in your business or to produce income.
- Neither you nor an associated person intends to use the asset in a business or in the future to derive gross income. And the cost of disposing of the asset would be more than any proceeds from disposing of the asset.
- The asset is neither a building nor an asset being depreciated using the pooling method.
Assets costing $5,000 or less qualify for an immediate write-off provided: (this was part of the Covid tax relief package, for the period 17 March 2020 to 16 March 2021) then the amount drops to $1,000 from 17th March 2021.
- They do not form part of some other asset.
- They are not purchased from the same supplier at the same time as another asset and the total is more than $5,000.
Shareholder Current Accounts
If a shareholder current account is overdrawn at balance date (i.e. shareholder owes the company funds), this may result in a Fringe Benefit Tax liability. This means that the company is legally required to charge interest on this balance at interest rates prescribed by the IRD and the interest is then treated as income in the business and tax is liable on this interest. It may be advisable to credit a salary or dividend to the current account before year end.
Imputation Credit Account - ICA
Your company’s imputation year is from 1 April 2020 to 31 March 2021. Please ensure the ICA is not in debit at 31 March 2021. A debit ICA will attract a penalty.
Companies – Shareholding Continuity & Commonality
The ability to carry forward tax losses is subject to shareholding continuity of 49%. The ability to offset losses against the net income of other group companies requires common shareholding of 66%.
Note these tests must always be met and not just at year-end.
If you are anticipating shareholding changes and believe you will breach continuity, forfeited losses can be minimised by accelerating income recognition and minimising deductions where possible. Also, consider the payment of a dividend or making a taxable bonus issue to use imputation credits before they are forfeited.
The legislation in this area is set to change, with a same or similar business test enabling businesses to carry forward tax losses where they lack shareholding continuity of 49%, but the underlying business continues in operation. This is expected to be effective from the 2020-21 year
Goods and Services Tax
As part of your year-end procedures, a reconciliation between the entity’s GST return and the balance of the GST account in its financial statements should be undertaken. This reconciliation can provide a useful warning about any discrepancies and provide an opportunity to rectify any issues. Also, this reconciliation is generally requested by Inland Revenue as part of their audit procedures.
If there are unreconciled differences, we recommend a GST review be performed to identify possible system issues.
After 1 April, Inland Revenue will be automatically issuing pre-populated income tax returns. Where the individual confirms or Inland Revenue is satisfied the information is correct, a refund or tax bill will be automatically calculated. Due to the risk of error, it would be useful to have any pre-populated income tax returns reviewed by us prior to confirmation.
Where residential property is held for five years or less (two years or less if the property was acquired before 29 March 2018), it may be subject to the “bright-line test” with any profits on sale subject to income tax. There is an exemption for the family home in most circumstances.
If you are considering selling residential property held for five years or less, or considering transferring ownership as part of a restructure, we recommend seeking advice first as the rules are complex and the consequences can be significant.