Conventional wisdom says you should defer any income in the last couple of weeks of EOFY in June until the next financial year – reason being that you’re able to give yourself an extra year of grace before needing to pay tax on that income.
Further, business owners are encouraged to write off bad debts incurred during the financial year before 30 June so they can use it as a tax deduction.
Both of these practices deserve closer examination.
Businesses should always be focusing on cashflow first and foremost, as this provides the working capital that’s needed to grow and innovate. For small businesses, this means more money that you can put towards purchasing equipment for immediate asset write-off.
While managing tax affairs is important, it is always better to make money first and then manage the tax implications afterwards.
Collecting unpaid invoices before the end of the financial year means your business can record a better tax position, which looks better for investors, lenders and buyers in terms of assessing the overall success of a business.
The sooner you collect any invoices, the lower the chance is of a debt becoming “bad,” which means less effort to collect money owed.
There’s also a more practical consideration. Ahead of the EOFY, businesses will be using their funds to take advantage of instant asset write-offs, paying super, prepaying for supplies and other services.
What this means is that cash supplies are often maxed out before 30 June. Trying to collect outstanding invoices in the new financial year will be harder, as many businesses and individuals will have spent their July cashflow in June.
To stay on top of the pile for payment, you need to be using the last couple of weeks in the financial year to be sending reminders, and it’s best if you use multiple methods – email, SMS and phone – to do this.
Your customers may only be able to claim GST credits after they have paid for the goods of services that they have bought for their business (depending on the GST registration). This is worth mentioning in your follow up calls and invoice reminders, as it may encourage them to finalise payment before the end of the financial year to benefit from the tax credits they’re entitled to.
But what if you’ve chased invoice payment already and it’s come to nothing? Should you write it off as a bad debt and use it as a tax deduction?
Not so fast.
Writing off a bad debt in your business reduces your tax liability as your reported income will be reduced by the bad debt expense.
Before you write off a bad debt for tax purposes, you need to be certain that the debt is not collectable.
Writing off a bad debt means you are losing out on that money from your business’ bottom line, so it isn’t a path you should pursue willy nilly.
In order to write off a bad debt for tax purposes, you will need to have taken reasonable steps to recover the debt from your customer.
This means using multiple means of communication to recover the debt, including email, SMS and phone calls. According to ezyCollect data, the best times for sending reminder emails are Tuesday afternoon and Thursday morning.
If all else fails, send a “Letter of Demand,” ideally on a law firm’s letterhead for best results.
The response to your demand letter will you help you decide if a debt can, or should be, written off during the current financial year, or possibly sent to a debt collector/legal firm for further action.
Raj Kuckreja, CFO, www.ezycollect.com.au
