It’s tax return time coming up, can you talk us through the steps to get ready?
First things first, are you using a Chartered Accountant? We are trained in all the areas of business and can use this knowledge to assist in the filing of all your taxes and making sure you pay the least amount of tax allowed.
We would like to start off with a fully reconciled ledger system such as Xero. The next step is to back up all the items on the Balance Sheet, do they all agree to the source documents such as the Aged Debtors and Creditors reports.
Depending on the business, we then ask – does the bank balance agree to the bank statement? Have you purchased any assets, and if so, invoices please? Did you spend money during the year on repairs and maintenance, legal fees, overseas travel, if so, invoices please. Have you written off all your bad debts (if any) on 31 March? Ideally, you will have received a questionnaire from your accountant which should cover the detail required, then all you’re required to do is a complete questionnaire, attach any receipts and send it back to your accountant.
There will be employees and self-employed people out there who have claimed the government wage subsidies in the last financial year – how will that affect their claim?
If the 12-week wage subsidy is paid by the employer as a single lump sum there are no tax consequences for the employer. The receipt of the subsidy is exempt income and the payment to an employee is not deductible.
The subsidy will only be tax-free as excluded income for a self-employed person to the extent it is used by them to subsidise the wages of their employees.
There is a new 39% personal tax rate applies from 1 April 2021; what does that mean for us?
For a lot of people, this will not be an issue, however, for those earning in excess of $180k, this higher tax rate will mean some good tax planning with your accountant will need to take place.
What about people who get bonuses, does the new rate apply to those?
The new rate will apply to those who receive a bonus and are earning more than $180k. A bonus paid before 31 March 2021 would not be subject to the higher tax rate.
With the end of the financial year approaching, can you explain about dividends and why a company should or should not pay one?
A dividend is a return to the shareholders for supporting the company and should be considered based on cash resources. The dividend may become part of the tax planning for the business that needs to take place with your accountant BEFORE 31 March.
There are so many foreign words at this time of the year, one I have come across is an imputation credit account, can you explain what this is and what it means for a company right now?
When a company makes a profit, it pays tax. If the company decides to pass on some of the profit to the shareholders in the form of a dividend, the company must also pass on the tax it has paid on the profits (as well as a top-up that is normally required when the dividend is paid). In theory, as the company has paid tax on the profits the shareholder should not have to pay any further tax. The Imputation Credit System is the method used for passing on the tax to avoid double taxation.
And in regard to a shareholder current account, if this is currently overdrawn, what’s the best path forward?
An overdrawn current account occurs when the owner has taken funds out of the business in excess of the funds the business has generated. There are taxation consequences for this and as accountants, we use a variety of tools to alleviate the consequences (where possible) such as shareholder salaries and dividends to name but a few.
Can you explain what ‘bad debts are’ and what if we have one should we do?
A Bad Debt is a customer who will not pay your invoice. You have tried repeatedly and taken all practical steps to collect the payment. In this case, you are allowed to write off this invoice (which reduces your tax liability) as long as the write off takes place on or before 31 March.
I have tax losses and I’m looking for new investors; will I lose my tax losses if I sell my shares or dilute my shareholding?
IRD has recently proposed a new system to enable people to invest in the business without the loss of tax losses. As this is very new, I would suggest a phone call to your accountant to discuss further.
This can be a really frustrating time of the year, and many of us may be feeling overwhelmed, I know I am! What specific advice (aka Oxen hack) would you give them to ease the stress short term and potentially long term?
Instead of trying to get all the information required together at one time, set up a file and during the year file the required invoices. In other words – take bite-sized chunks out of the potential overwhelm.
The same logic applies to Xero – don’t wait until you have 500 transactions to reconcile, try reconciling each day in the morning for 5 minutes.
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