Fraser Hurrell, Author at Whangarei Accountants - Elevate CA - Tax, Xero, Business Development, Accounting

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Tips ahead of the Financial Year End

The end of the financial year is fast approaching for the majority of businesses. Here are a few areas you may wish to look at now which will help us minimise your tax bill.

1. Trading stock

We’re not talking about livestock here, but the general rule is that inventory must be valued at the lower of cost or realisable value. A general adjustment for obsolescence will not cut it with the IRD. Any business that carries more than $10,000 in inventory must perform a physical stocktake at year end – and you should take this opportunity to dispose of obsolete stock or write it down to its net realisable value.

2. Repairs and Maintenance

It may be worthwhile to bring forward repairs and maintenance before the end of the financial year, as this will also bring the tax deduction forward by a year.

3. Retentions

Retentions on building contracts are generally taxable in the year the contractor becomes legally entitled to receive them. Building contractors should be mindful of this at year end.

4. Employee Expenses

Expenses such as holiday pay, bonuses, long service leave or redundancy payments can be claimed as a tax deduction in the year ended 31 March 2012 as long as they are physically paid by 2 June 2012. Keep this in mind when planning these payments.

5. Business expenses paid privately

Business expenses paid privately often fall through the gaps – and the opportunity to claim a tax deduction is lost. Now is a good time to gather up any receipts – and to reimburse yourself from the business so there is a clear paper trail.

6. Bad debts

Where you write off a debt that has no reasonable expectation of being paid after taking all reasonable steps to recover it, this is tax deductible. The catch is that you must have physically written the debt off before the end of the financial year, so now is the time to consider this.

7. Fixed Assets

Now is a good time to review last year’s fixed asset schedule, as the book value of assets can be written off as a tax deduction where they are no longer used by the business and the cost of disposing of the asset is likely to exceed the value.

8. Prepayment of expenses

Most expenses cannot be fully claimed as a tax deduction if you choose to prepay them just before the end of the financial year. But there are some potential exceptions like stationery, postage, courier charges, vehicle registration, road user charges, rates, journal subscriptions or accounting fees which can be paid in advance and claimed as a tax deduction. No, we’re not fishing for payment in advance for this year’s accounting fees – but I’m sure you can see some possibilities here.

And for those few clients who have not yet provided their records for the year ended 31 March 2011, do it now! The final deadline for most clients for filing with the IRD is 31 March 2012 – and there will be almost no chance of us getting your work completed on time unless we have your records before the end of February!

To Fix or to Float – that is the question.

For a week or so back in July, we figured it might be time for those with floating business or residential borrowing to fix the rates on say half of their debt. At that time we were seeing June 2011 quarter annual inflation figures well above expectation – as well as higher than expected economic growth. The writing seemed to be on the wall for floating rates to edge upwards sooner rather than later. Floating residential rates at that time were around 5.75%pa – and although three year fixed rates were up close to 7%pa, it seemed reasonable to hedge against those floating rates rising.

Then we saw bad economic news in Europe and North America swamp any fragile recovery in New Zealand – and with it any likelihood that floating rates would rise. So most people whose business or residential borrowings were floating back in July are probably still floating today.

But things are changing again. Floating residential mortgage rates with most banks are still around 5.75%pa – unchanged from where they were last July. But fixed rates have edged down over the last few weeks with three year rates now down around 6.1%pa at the major banks.

So although the chances are not high of the OCR increasing any time soon, perhaps it’s time to consider paying a little extra for the security of locking in the historically low three year fixed rates currently on offer? You can be sure that when the masses start jumping from floating rates to fixed, the banks will bump fixed rates up quickly – and today’s opportunity will be lost.

So will one be better off riding the nice low floating rates for a few more months – or paying a little more today in return for locking in today’s nice low three year fixed rates?

The answer to that question depends on how soon the Reserve Bank starts to lift the OCR. The general consensus amongst economists is that this will occur around the end of 2012. If the Reserve Bank acts a little sooner, then fixing now will in hindsight look like a rather smart move. But if rises in the OCR are delayed into next year, riding the floating rates will have in hindsight seemed the smarter move.

But now that the margin between floating and three year fixed rates is much smaller than it has been in recent times, the certainty from fixing now comes at very little cost. If – like 63% of Kiwi businesses and households – your borrowings are on floating interest rates, I’d urge you to give this some serious thought.

Be a sought after Employer (Whangarei)

We hear so much in the media about unemployment, but the experience of most business owners is that there is no pool of great talent waiting at the front door. Finding and retaining good people for your business is a challenge.

Of course it is essential for businesses to identify their competitive advantages in the marketplace. But equally important is to identify and nurture their competitive advantage as a sought after employer.

This Business Owners Forum event will be held at the Elevate CA office on Robert Street, CBD Whangarei at 5:30pm on Thursday 17 May 2012 – and will run through to 7:30pm on the night.

This will be a must attend event for business owners who recognise the need to develop a competitive advantage as an employer of choice.

As always for Business Owners Forum events, this session will be free of charge and completely free of sales pitches from the supporters or the panelists. And there will be pizza, beer and wine to lubricate quality discussion.

Business Owners Forums are held monthly on the third Thursday of the month – alternating between North Harbour and Whangarei venues.

If you’d like to attend this event, email Fraser Hurrell before the end of 14 May 2012. And if you’d like to be included on the invite list for future events, just add your contact details in the box to the right.

Should NZ introduce a Fat Tax?

Would a “fat tax” be a step too far? Could the tax system perhaps encourage Kiwis to be healthier?

It already does. Imagine how many more Kiwis would die prematurely from smoking related conditions if not for the fact that cigarettes are artificially expensive with around 70% of their price made up of tax?

Who would seriously argue the excise duty on cigarettes should be removed? Not many, I’d say.

So I followed with interest the debate around Labour’s proposed removal of GST on fresh fruit and vegetables. A significant number of Kiwis die prematurely each year from conditions related to obesity, so maybe Phil Goff was onto something with this one?

Labour’s premise was that if fresh fruit and veges were less expensive, Kiwis would on average substitute them for less healthy options and the overall health of the nation would improve. Interventions through the tax system clearly work for smoking, so why not use the GST system to fight obesity?

Not unreasonable on the face of it, I thought.

But I had my doubts about the success of this particular concept. Food items are carefully priced to the market – almost always at a price that ends in .99c. If bananas sell for $2.99/kg now they would not stay for long at $2.60 after the removal of GST – they’d soon creep back to $2.99 with an increased margin for the retailer.

And with the election behind us, we’re unlikely to put that debate to the test in real life New Zealand any time soon.

But the idea of using the tax system to influence behaviour hasn’t gone away – and nor is it the exclusive territory of the Labour party. John Key removed depreciation allowances on buildings because he also believed that changes to the tax system could be used to modify people’s behaviour – in this case dampening the Kiwi love affair with property investment.

So back to the idea of using the tax system to fight obesity. Is that workable, or would such a scheme just amount to meddling around the edges of a larger problem?

By looking to Denmark we can soon get the answers to those questions.

On 1 October the Danish parliament introduced a new “fat tax” with the intention of reducing cardiovascular disease, obesity, and diabetes. The tax imposes a price increase based on formula of 16 krone per kilo of saturated fat on any food that contains more than 2.3% saturated fat.

Bold. And a world first.

Will the fat tax change behaviour enough to increase the average Danish lifespan or improve the health of the Danish people? I guess we’ll know for sure in ten years or so when the results of longitudinal studies become clear.

But how about us Kiwis? Is this the sort of intervention our political leaders should be considering? Would this be too much intrusion into our lives – and an affront to our free will? Or is it appropriate that the state puts some energy into countering the millions spent by multinationals who market tobacco and calorie-rich convenience foods that on average reduce our life expectancy?

I think it’s an interesting concept that has merit – and I’ll be watching with interest to see how this unfolds in Denmark.