I recently had an example of some actions that astounded me somewhat.
The instance came about that an client had duly dropped in her records for processing each year for a number of years, and when the Financial Statements were prepared each year, she simply signed the Tax Return where indicated, and thought all was well. She never wanted to come in to discuss the accounts.
Not all was well when it came to light that she had sold her business and wanted to end the necessity to file a Business Tax Return with the Inland Revenue Department.
Upon ceasing the business, all assets must be accounted for, whether they are sold or retained. The largest asset was the land and buildings, from which the shop had operated.
Now the issue with buildings is that we get to claim a non-cash expense, essentially an allowance each year, in the books. Over a number of years, this depreciation accumulates to what can be a substantial figure, depending on how long the building was owned.
The problem with buildings is that they usually appreciate. Thereby when the building is sold, the written-down value of the building is such that there is depreciation recovered. This large sum of depreciation recovered is taxable, and can result in a large tax bill in the year of sale.
On topical note, the tax legislation has been changed with effect from 1 April 2011 and there is no longer a depreciation claim for buildings with a useful life of more than fifty years.
However, in this instance it came to light that the building had actually been sold a number of years earlier. Upon sitting around the table with the client and explaining the matters, the reply was "Well you do the books, and I thought it was all taken care of." It was pointed out that this is not a defence. We must remind out clients that they are responsible for the information provided, and they are responsible for the end result. We compile information based upon what they tell us, and if they do not tell us things, we are not mind readers.
I always prefer to go through the Financial Statements with our clients to make sure that they understand, and give them an option to ask any questions they may have, as this can avoid surprises of a nasty tax nature, well after the fact.
It is important to read and understand your own financial statements and tax affairs.
Hamish Pryde BBS, CA (PP)