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.

If you have a balance date other than 31 March, then this article won’t be particularly relevant.

How does COVID-19/the lockdown affect the financial year-end?

Stock takes
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.

In the meantime, we assume that the solution to this would be to carry forward last year’s stock figure unless, there is some better information available.  We would not be surprised if there was a legislative fix for this in due course.

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 selling toilet paper and hand sanitiser of course).  

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, 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 in due course.

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

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 have agreed to take leave over the closedown period.

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