As the end of the financial year looms, there’s always the prospect of paying too much tax. It doesn’t need to be this way.
One of the biggest areas often overlooked, is the importance of writing off bad debts. It is not uncommon for us to see businesses with large amounts of money owing to them. There is often a big profit, which has been inflated by an excessive accounts receivable figure. The reality is some of this cash may never be collected.
The law will not permit advisors to write off bad debts backdated to the previous year. You must pay the tax and wait until next year to get these bad debts written off. In the end, the result is the same, but in the meantime, you must pay tax earlier than would have been necessary.
Look at the debts owing to you. Are there some debtors you have been pursuing, who won’t pay you? Have you taken every reasonable step to get paid? If your answer is yes, you must write off the bad debt before your balance date in order to reduce your accounts receivable, profit and tax.
If you use a cloud accounting software like Xero or MYOB, you can write off a specific invoice by creating a credit note and allocating it to the invoice. The key is to not use a sales code for this credit note, instead using an expense code named Bad Debts. After allocating this credit to the invoice the debtors balance will reduce and, on your profit and loss will reflect a bad debt expense. This results in a reduced profit, and therefore reduced tax to pay. You should tell your advisor of the amounts written off, as Inland Revenue likes this to be recorded separately.
All work done up to 31 March which is capable of being charged must be included as income. For income tax purposes, holding some of your invoicing over until April does not necessarily mean you can ignore it. You don’t have to send out an invoice, but you do have to add the value into your accounts receivable figure for tax purposes. You won’t be taxed twice because once we have put in a figure for the amount owing to you, we then deduct it in the next year’s accounts. If work cannot be charged because it is not quite complete, it won’t get included in your accounts receivable.
Some businesses have work in progress, which is partly completed work. This must be valued based on the amount of material put into jobs in progress and the value of the wages paid for that work. Any other direct costs should also be included such as hire of equipment.
No business wants to do work or provide a service, and not get paid for it. Carrying out credit checks on customers you intend to offer credit to is invaluable. Nexia New Zealand have experienced staff who can assist you in this process.
We offer several credit related services, and have significant experience in collecting outstanding debts, whether these be new debtors or those that are proving difficult. You can continue to pursue debts, even if you have written them off. Any success you have will contribute to your profit.
Click here to learn more about our Nexia Collect services, and please do not hesitate to contact us if you would like more information.
February 3, 2020