Well, this 31 March feels a bit different, doesn’t it? This year-end seems more like prepping for a doomsday than gathering your info to send off to us.
If you want to look for a positive, the lockdown is going to give many of you some extra time to focus on year-end matters. Our team are ready to receive your info and our cloud based solutions mean we can have everything underway asap.
How does COVID-19/the Lock-down Affect the End of Financial Year?
Stocktakes
Doing a stocktake is unlikely to be possible at present for almost all businesses. Even if a business is not locked down, a stock take is probably an extension of the essential services.
We advised all of the clients we spoke with prior to lock-down to do a quick stocktake prior to locking up. Our thinking at the time was more to do with being able to make accurate insurance claims if the premises was accessed by some undesirables during lockdown. These will be a really good source for us to now to at least draft accounts while in lockdown to help with any required bank lending you may need.
If you don’t have 100% confidence in your quick stocktake figures for tax reporting or you simply didn’t get any before lock-down, don’t worry. The stock and work in progress on your first day back should be identical to year-end. Make stocktake one of your first tasks back. This will let you see if anything was stolen during lockdown as well as letting us finalise those draft accounts nice and quick.
We would not be surprised if there was a legislative fix or IRD ruling on this soon so everyone is working from the same play sheet.
Stock Valuations
For clients who use a stock method that has a market value aspect to it, it is fair to say that values will be down in many cases (unless you are hoarding stocks of toilet paper and hand sanitiser).
If an independent valuation is required, that would not be possible at the moment as valuations are not an essential service.
Work in Progress
For service industries, some thought needs to go into whether to invoice as many sales as possible with the knowledge that your customers are likely to be slow paying and therefore the sooner that the amounts are billed, the sooner you will be able to get some cash in.
On the other hand, the 2020-21 year is very likely to be down on the 2019-20 year, and if not invoicing the amounts defers that income into the next year there will be a tax timing difference in doing so. However, “cash is king”, so we recommend getting your invoices out as soon as possible.
Bank Reporting
With everything that is going on, we expect that banks will want financial statements from their customers sooner than usual. Also, if you are looking to take advantage of the Government-backed lending scheme, we expect that the banks are going to want to see budgets and cashflows.
Therefore, we would suggest that you take the opportunity while things are probably a bit quieter to get your financial information up to date.
Bad Debts
A bad debt needs to be written off on or before 31 March 2020 to be able to claim it in the 2019/20 tax year. Since the cash flows of many businesses are in a pretty dire state, we suggest you urgently give your debtors a good working over to identify any debts that are bad.
The tax requirements for writing off a debt as bad are:
- The taxpayer decides the debt is bad – the test for this is that a debt is bad when “a reasonably commercial person would conclude that there is no reasonable likelihood that the debt will be paid”; and
- The debt is written off as bad in the accounting records.
Note that writing a debt off as bad, does not prevent you trying to recover that amount in the future. If a debt has been written off is later recovered, that amount is treated as income.
Tax Considerations
Inland Revenue’s Attitude to Late Payments
As mentioned in prior guidance we have provided online, Inland Revenue has signalled a somewhat relaxed approach to tax payments. They do not want taxpayers reaching out to them (as they do not have the capacity) but have suggested that taxpayers request penalty and interest write-offs when we all have a little more time to deal with those things.
Taxpayers should not get behind on GST or PAYE payments as these are effectively collected on trust for the Government.
If you know that you have overpaid 2020 provisional tax, an estimate can be filed to get an earlier refund. We would normally recommend caution using estimates due to the impact that these can have on the use of money interest calculations. However, with Inland Revenue signalling use of money interest write-offs, this won’t be as crucial as it is in normal years.
For most provisional taxpayers, use of money interest will only accrue from 7 May. Therefore, it is helpful to have a pretty accurate tax calculation by that date. However, the Inland Revenue’s relaxed approach to the use of money interest reduces the importance of this.
Relevant Information for Forecasting 2020 Tax Payments
Foreign Investment Funds (FIFs)
With the state of the share markets, it is fair to say that the FIF calculations are not going to look too pretty for those who have investments in the foreign share markets. For those who can use the CV method (i.e. entities other than companies), the FIF result is very likely to be zero.
Foreign Exchange Gains and Losses
At the time of writing, the New Zealand dollar is well down against major currencies, but up against the AUD. Therefore, we would expect some pretty significant FX gains and losses depending on the currency and whether an amount is an asset or a liability.
Holiday Pay 63-day Adjustments
For taxpayers who are adding back their holiday entitlements, the 63-day adjustments are likely to be quite large, as many employees may have agreed to take leave over the close-down period.
Its Time to Get in Touch
The team at MBP are ready to help you get your end of financial year tax and accounting sorted. Reach out to your normal Business Partner or Business Support Manager to get the ball rolling. They’ll be able to tell you anything specific we may need from you.