Do you sometimes wonder what your accountant does at year end after you drop everything off to them sometime after 31 March (or in our case email everything to us)?
Well, a client commented to me recently that the accounts we had prepared didn’t seem to show any substantial change from the information they could have produced themselves from Xero. And in their case they were right.
What I realised though was that they had no idea what we had done behind the scenes. So a quick run down (not the complete list but a summary) and a health warning: although this is what we do, it may not be what your accountant does!
So these are some of the things we do at year end:
- Review the integrity of the information you have provided ie we check your Xero is fully reconciled and there are no orphan transactions etc.
- Scan the detailed general ledger showing every transaction over the year to check that everything is in the right place (we don’t worry about little amounts that have been incorrectly categorised but putting “Dick Smith” or “Harvey Norman” next to a purchase for $2,400 doesn’t help us much and we’ll have to go back to you for more information!), the GST categorisation is correct (e.g. you can’t claim GST on overseas travel), and that you are only claiming what you can. Some examples: clients will often categorise loan repayments as an interest expense but only the interest portion is tax deductible on the Profit and Loss statement and the principal repayments go to reduce the loan amount on the Balance Sheet. And just because you have been claiming something for years and you presumed it was OK because your previous accountant and Inland Revenue hadn’t said it wasn’t OK, doesn’t mean it is deductible (sorry!).
- Reconcile the GST (and PAYE if relevant) – this means we run a GST report for the whole year to see how much GST you should have paid and then compare that with what you have paid. If there is a difference and especially if you have underpaid and owe Inland Revenue money then you will want us to explain why – so we need to understand just where you went wrong. Then we fix it, usually in the next GST return.
- Calculate any fringe benefit implications, mainly from owning vehicles in a company.
- Add fixed assets to a Depreciation Schedule, assign depreciation rates (it can take a while sometimes to find the right rate especially if the client has been quite vague about what they’ve bought), dispose of assets no longer used or sold during the year etc, and run the depreciation for the year.
- Reconcile any loan balances so that the loans on the Balance Sheet match the figures supplied by the bank at 31 March. This involves quite a bit of work if you have restructured loans during the year.
- Add in stock figures, home office costs, petty cash items, mileage, credit card details etc.
- Prepare journal entries adjusting the profit for the non-deductible items such as some entertainment, Inland Revenue penalties, speeding tickets etc.
- Check the Companies Office record for two things: first to make sure that the latest annual return has been completed (most clients prefer to do this themselves but have then been surprised when we tell them it hasn’t been done and that the Registrar of Companies has started action to have the company struck off), and, second, to see whether the shareholding has changed during the year as a shareholding change can have major implications for a company’s ability to carry forward losses or attach imputation credits to dividends and affects the allocation of profits and losses in look through companies.
- Review the year end profit and decide on the best tax strategy – this is the fun and creative part of what we do and means we look at the profit and decide the most tax effective way of allocating it among the shareholder employees as salary or dividend, leaving some in the company etc while maintaining commercially reality. Factors to take into account are the amount of provisional tax the company has paid during the year, how much the shareholders have paid (if we do their personal tax returns, and taking into account their income from other sources or losses from a rental property etc as we want to keep everyone under interest and penalty thresholds if we can), the amounts the shareholders have drawn out during the year (truly this can give us a real headache), the residency status of the shareholders, whether a trust is a shareholder (this can give some tax benefits but adds a level of complexity), the amount of imputation credits available from prior year company taxes , whether there are tax losses carried forward, the ACC costs of paying others a shareholder salary, whether any allocation will result in negative equity (and require shareholder solvency resolutions), the personal services attribution rules, Penny and Hooper etc as well as the cost effectiveness even of doing anything complicated.
- Check all figures to make sure they make sense!
- Add in minutes, annual report, and insolvency resolutions if required.
- Import the base details and then complete the tax return (these are subject to human error (yes we are human) and software glitches so don’t always transfer across sensibly).
- We provide a report to clients in plain English explaining what we’ve done and what’s required now, including the income taxes due for the next tax year. Talking to new clients and other accountants this is something unique that we do but is very important to our clients.
- Everything is peer reviewed and it goes out to you. You may come in for a meeting to discuss the results with us in more detail.
- When everything is agreed and you are happy with the numbers we electronically file the necessary returns with Inland Revenue.
- After a while Inland Revenue sends us an assessment notice that should agree with the returns we filed for you. Not always though – as many as 10% of the assessments they send back are wrong in some way so we need to follow up on these before we get back to you. You’ll only hear from us about it if there’s a major problem such as you provided a voluntary estimation of your income tax towards the end of the year and now Inland Revenue is charging you a large amount of interest because you earned more even though you would have been in the safe harbour threshold if you hadn’t voluntarily made the estimation.
Underlying all this is the need to balance the cost effectiveness of what we do. So while we cannot guarantee that every cent has been correctly accounted for, our work provides you with confidence that you haven’t done anything significantly wrong tax wise. Plus you have a beautiful set of financial statements that you can give to the bank for a business or home loan, to prospective buyers, and to your shareholders, a tax return and a report that explains it all.
You also have the satisfaction of knowing that the annual tax return process has been successfully and painlessly completed for another year so you can focus on what you’re good at – running your business.