With the end of the financial year looming it is time to spend a few minutes considering what you could do to ensure you get maximum deductions against income in order to reduce your taxes.
Question 1: Can I buy an asset and write the full purchase price off?
We have three weeks to go to year end and I often get asked can I go out and purchase an asset and write off against my income? Well the short answer is no – as only one month of depreciation would be claimable.
However, if you have significant repairs and maintenance scheduled in coming months you may wish to do this before year end as anything that is spent will be deductible.
Question 2: What can I buy to reduce taxes?
Bring forward planned expenditure on consumables such as stationery, travel, advertising and all of these spent before March fall into the current financial year. Just make sure that these expenses are not prepayments in other words expenses that you are paying in advance that will need to be apportioned over the next twelve months.
Question 3: Are donations deductible?
If you love giving, make sure your donations are done before 31 March. If you earn taxable income, a third of what you donate can be claimed back. This is a separate return from your personal tax return. So you can claim the rebate regardless of whether you need to file a tax return or not.
The first three tips all involve spending money – just remember your cash flow. As you’re spending money to reduce taxes which only equates to a third of the spend. These taxes are not due until months ahead but you may be spending cash now that your business really needs.
Question 4: Do I need to do a stocktake?
Not all business that manufacture, buy or sell products need to do a stocktake. This is not necessary if your turnover is less than 1.3 million and stock is less than $10,000.
However, a lot of businesses that carry stock don’t fall into this category and a stock take is necessary. Make sure you identify and write down any damaged or unsaleable stock. In practical terms stock value reduces your purchases which in turn increases your net profit. So with over inflated stock values you end up paying more tax.
Don’t forget stock is calculated at cost price or net realisable value whichever is lower, exclusive of GST.
Stock needs to be counted on the 31st.
Question 5: Should I review the fixed asset register every year?
It is important every year to look at the fixed asset register, as there may be assets lurking on there that fell apart years ago.
When an asset is written off there may be a further deduction that is allowed.
If assets have been sold below book value there will be further deductions or above book value further income.
Also throughout the year assets may have been added that’s value is less <500, these you can get a full deduction for in the year of purchase.
Conversely there may be assets missing from the schedule and these strengthen your balance sheet and should be added.
Question 6: Do I need to write bad debts off before March?
Bad debts should be written off before 31 March. If not they form part of your Gross Sales of which you pay tax on.
There is a difference between doubtful and bad debts. In order for the debt to be considered bad you must have taken all steps to try and recover the debt and there is no likelihood of it being recovered. If the debtor has died with no assets or insufficient assets to pay, the debtor can’t be traced or has gone bankrupt or to liquidation and insufficient funds exist then these should be written off.
Don’t forget if you haven’t recognised the income in the first place you can’t have the bad debt deduction.
For a better understanding about your business tax, call us on 09 638 8736.