The taxman cometh
How to trim your tax bill
The end of the financial year comes without the parties and festivals that mark the end of the calendar year, but it can still leave you with a hangover if don’t tackle it correctly.
They say the only certainties in life are death and taxes, and yet the most common reason given as the cause of a business being put into liquidation is ‘failure to provide for taxation’.
It’s tragic that tax should be responsible for 15 per cent of failed businesses, not to mention totally avoidable, given you only pay tax if you’re making a profit.
In my experience, when there’s no money in a business’s coffers to pay its tax bill, it’s due to a number of key mistakes.
The first is spending money just to reduce your tax burden. There’s an attitude that if it’s tax deductible, it’s basically free – but it’s not.
It’s completely illogical to spend a dollar in order to save 30c. It does nothing to help your cash flow and it’s making your business inefficient.
The second mistake is mingling personal costs with business costs. Many assume pushing personal costs into the business is helpful because it will lower profits, which lowers tax.
However, from an accounting perspective, even if they’re legitimate costs they’re often considered owner drawings (which are not deductible), so all they do is reduce the cash available to pay your taxes.
Many accountants also fail to notice, or alert you to, areas that can save you serious money.
If the business owes you money because, say, you’ve neglected to physically pay yourself a salary, the business could take over some of your mortgage, making those interest payments tax deductible.
This can save you thousands of dollars in tax and it’s legitimate – but often overlooked.
So, here’s what you need to do before the end of the tax year. Chase down your debtors. You pay tax on sales even if you haven’t been paid so collect what you’re owed or, if you’re unlikely to see the money, write those debts off.
Run your stock levels down. Claim what you can, but make sure your accountant is aware of any legitimate personal expenses put through the business, so they don’t get classified as drawings.
Only spend money that needs to be spent.
Then, from April 1, consider paying your tax monthly as it’s earned. I’m not sure connecting your accounting software to the IRD is the best way to fix this, but voluntary payments, with your data remaining your own, can be.
Ensure personal costs are kept separate from the business.
Then consider getting an independent review of your accounts.
Dealing with tax is no New Year’s Eve festival of fun, but it’s unavoidable. What is avoidable is not having the money to pay the tax you owe.
Don’t let it happen to you. Hannah McQueen is a financial advisor and author.