5 EOFY tax mistakes to avoid
At a glance
Here’s a snapshot of the advice from our interviewees:
- Be disciplined with your recordkeeping – set aside 30 minutes every other day to stay on top of things. Your future self will thank you.
- Write-off debts that are not recoverable, such as stock that has become obsolete and assets that no longer generate revenue to maximise tax deductions.
- Seek expert advice to help you understand how deductions on assets work to avoid any unwanted surprises.
- Put aside money weekly to cover GST costs.
People go into small business to pursue their passions, not to get bogged down in administration work. This is why it’s important to prepare for your taxes ahead of the end of financial year (EOFY), so it doesn’t become too much of a headache.
As the EOFY falls on the 31 March (see our handy infographic with key 2021 dates and tips), we asked tax expert Jayesh Kumar, director of tax services at William Buck, and small business owner Dan Pollard, founder of Fergus, which provides job management software for trades and service businesses, to share some EOFY mistakes to avoid.
Mistake #1: Being inconsistent with your record-keeping
“It’s easier to be tied up with other aspects of the business than financial record-keeping, and therefore self-discipline is key,” says Kumar.
“Every transaction, small or large, should be recorded, and invoices for personal and business items should be separated.
“Also, consider locking all accounts relating to the past financial year, so that data remains accurate, ensuring an easy transition into the new financial year. Also, create second copies of all accounts, then back them up. Print out key reports, like profit and loss statements, balance sheets and your general ledger.”
Keeping such meticulous records may sound overwhelming, especially if you’ve fallen behind. But Kumar advises scheduling half an hour every other day for the task – a small investment of time which may pay off in the long run.
If you’ve invested in accounting software, make the most of its time-saving potential by maintaining your financial knowledge and skills through ongoing training, Kumar adds.
Mistake #2: Failing to review debts, inventories and assets
“Before the EOFY, it’s important that small business owners review their debts, inventories and fixed assets, then accordingly write-off debts that are not recoverable, stock that has become obsolete and assets that no longer generate revenue,” says Kumar.
“This is advisable to maximise tax deductions.”
Pollard adds, “Any bad debts that aren’t written-off are classed as an asset by Inland Revenue (IRD NZ), so they’re subject to your total revenue calculation.
“Talk about leaving a bad taste in your mouth– paying tax on a debt that’s unlikely to be paid!”
He adds that when assessing assets, you need to be careful.
“It’s a classic mistake, to buy an asset, then assume it’s tax deductible,” says Pollard. “But that’s not how assets work.
“Let’s say you make $10k net profit, and tax is 30%, so your net profit is $7k, and you pay $3k to the IRD NZ. If you buy an asset for $3k, your net profit is now $7k, which means you pay $2.1k in tax and your net profit is now $4.9k. So, were you to buy a van, say, for $15k, you’d have a tax liability of around $5k.
“It’s important to be aware of how assets work, so you don’t get a surprise with the tax implications.”
Mistake #3: Tricking yourself into thinking GST is yours
“When cash flow is tight, it’s easy to see GST as yours,” says Pollard.
GST, at 15%, may not sound like much, but it can add up, and accidentally spending it may result in a major tax liability.
“If you look at your GST over the past year, you’ll see it’s pretty consistent. Use this figure to work out a weekly average, then put this into a dedicated GST bank account each week, so you’ll always have GST on hand to pay when it’s due.
“Importantly, this process creates the right mindset, applying pressure to put focus on cash flow, so your business can meet its obligations.”
Mistake #4: Not accounting correctly for PAYE and holiday pay
“Getting PAYE [pay-as-you-earn] and holiday pay wrong has much more serious implications than other types of tax mistakes because PAYE is your employees’ wages,” says Pollard.
“If you don’t pay, that’s classified as theft.”
“Work with your accountant or an online platform, to put enough money away at every pay cycle to account for holidays, sick pay, public holidays, etc. To meet your obligations could easily cost 8% of a salary – and that’s not including superannuation.”
Mistake #5: Failing to invest in expert assistance
It can be tempting to minimise expenses, especially following the COVID-19 pandemic.
“This can lead to small business owners making important decisions, such as the acquisition of significant assets, without consulting their professional advisers, resulting in missed opportunities, such as failing to minimise commercial risks, while maximising tax deductions,” says Kumar.
The same applies to preparing your tax return, adds Pollard.
“All in all, tax management is a total pain, and if you’re doing it by yourself, then hats off to you.
“Having a professional overseeing things and/or filing your returns can give you extra peace of mind and help you avoid tax problems in future.”
Need a little cash flow support? Talk to Prospa about how we might be able to help you access funds in a fraction of the time and without all the fuss. Find out more.
Find out how small business owners are balancing the tricky task of chasing payments for EOFY with maintaining relationships when times are tough.View more
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