Get ready for year-end

Before you say goodbye to the 2021 financial year, make sure you work through a year-end process to maximise your tax deductions and minimise your tax bill.  Here are the must-do items:

Assets

• Assets purchased between 1 April 2020 – 16 March 2021 costing $5,000 or less can be expensed. Assets purchased after 17 March 2021 costing $1,000 can be expensed.
• Depreciation can be claimed from the first day of the month of purchase
• Ensure assets traded in are disposed of and the replacement asset is depreciated and recorded at its full cost
• Depreciate residential rental property chattels purchased during the year
• Depreciation can be claimed on commercial property from 1 April 2020
• Review your fixed asset register. Ensure assets sold, stolen, scrapped or destroyed are removed from the asset register and loss on disposal calculated
• If an asset sale is expected to result in depreciation recovery, consider deferring the sale until after 31 March
• Review repairs and maintenance codes to ensure all assets are moved to the asset account where appropriate
• Ensure deductible feasibility and R&D costs have been expensed

Trading Stock

• Value closing stock at market selling value if this is lower than cost
• Carry out a stocktake at 31 March to ensure an accurate closing stock figure
• Write-off any obsolete stock
• If trading stock is less than $10,000, and turnover is less than $1.3m, you can use the opening stock value as the closing stock figure (even if this is nil)

Accruals and Provisions

• These are not deductible in the current year unless you are definitively committed to the expense at year end and the amount can be reliably estimated
• Keep a record of employment provisions paid out between 1 April and 2 June as that portion of the provision is deductible in the 31 March financial year. This includes holiday pay and bonuses

Repairs and Maintenance

• A one-year warranty purchased with a fixed asset can be deducted as an expense rather than capitalised, providing the cost of the warranty can be separately identified
• Review fixed asset registers to ensure genuine R&M has been expensed and not capitalised to fixed assets
• Consider carrying out R&M work before year-end

Bad Debts

• The debt must be physically written off the debtors’ ledger by 31 March to be deductible
• Retain documentation to support the debts as not recoverable
• Claim the GST adjustment of any bad debt adjustment if you are on invoice basis

Prepaid Expenses

• Some expenses paid in advance (eg, rent, insurance, advertising, service contracts and subscriptions) can be tax deductible in the current year if not treated as a prepayment in the accounts
• ACC levies are deductible only when paid

Donations

• Cash donations paid to donee organisations or registered Charities are deductible up to the level of net income.  If the business is in a tax loss position, consider the owner making the donation and claiming the donation rebate

Cut-off

• Follow year-end cut-off procedures to ensure sales, stock, expenses etc are accounted for in the correct year

Shareholder Matters

• Consider paying a dividend or shareholder salary if there is an overdrawn shareholder current account
• Check the company has sufficient imputation credits; consider bringing forward a tax payment if necessary
• Dividends for the 2020-21 year should be paid or credited before 31 March 2021
• Dividend withholding tax for any dividends paid in March 2021 is payable on 20 April 2021
• Review shareholding changes throughout the year to ensure shareholder continuity has been maintained
• If a dividend is being paid to a non-resident, non-resident withholding tax (NRWT) may need to be considered

International Matters

• Interest deductibility may be impacted by the thin capitalisation rules if there is control by a non-resident, or offshore investment
• Cross-border related party transactions need to be at an arm’s length price or will be at risk of being restated by the IRD under the transfer pricing rules
• Ensure NRWT filing obligations are met and payments to IRD for March 2021 are made before 20 April 2021

Income Tax

• The third instalment of 2021 provisional tax is due 7 May 2021 based on actual results to 31 March so it is important to have your records in order to determine this if you are not paying based on standard uplift, or your residual income tax for 2021 will be more than $60,000
• If you wish to use the AIM provisional tax method, you must be using the correct accounting software by 1 April 2021
• If you have not yet filed your 2020 income tax return, ensure it is filed by 31 March otherwise late filing penalties will be charged, your extension of time to file 2021 may be lost and the 4-year statute bar periods extends a further year
• A loss offset subvention payment for the 2020 income year must be paid by 31 March 2021

Look-through companies

• If you want your company to enter or exit the look-through company regime for the 2021-22 income year, the election notice needs to be filed by 31 March 2021

GST

• Where assets are used for both business and private use, make your year-end GST apportionment adjustment in the 31 March GST return
• Ensure you have made any GST adjustments required from the preparation of 31 March 2020 financial statements

System Considerations

• Ensure bank reconciliations are completed to financial year end and that all bank and loan balances in the accounting system match the bank statements that will be provided to your accountant
• Confirm the balances of outstanding creditors and debtors are accurate
• Where possible, lock your system at the year end to ensure no changes can be made once the final position has been determined

In summary, putting aside time to consider the above before you race into the new financial year will help ensure you maximise your tax deductions for 31 March 2021 and ultimately lower your tax bill. If you have any questions, please contact your Hayes Knight advisor.