Tax Implications of Changing Your Accounting Year
A company’s accounting year is the period for which it prepares its annual financial statements. It must consistently prepare its financial statements to that date. This enables users of financial statements to compare performance between years.
Changing your accounting year has tax implications. It poses problems such as gaps or overlaps in income taxed. The gaps and overlaps may cause under or overpayment of taxes.
In this article we discuss the tax implications of changing of your accounting year and the procedure for changing your accounting calendar.
Reasons for Change in Accounting Year
There are several reasons a company might want to change its accounting date. These include:
To align with a parent company’s year-end
If the company is part of a group, it may want to have the same year end as the other members of the group and that of its parent company. This facilitates the group’s financial statements preparation.
To align with the tax year
The company may want its accounting calendar to align with the tax year. For example, the partners of a firm who run some of their business through a company may prefer that the accounting calendar of the company align with the tax year.
To avoid paying premiums during peak periods
Many companies have a 31st December year end. January to April is the peak period for auditors. Small companies find that during the peak period, the cost of an audit is high, and they struggle for attention.
A company may change its year end to an off-peak period for lower fees and attention.
Tax implications of a change of accounting year
When there is a change of accounting year, the two possible outcomes are:
- You prepare accounts for a period of over 12 months to the new accounting date.
- You prepare accounts for a period less than twelve months to the new accounting year end.
When there is a change in an accounting year, there are three relevant years to consider:
- The twelve (12) months period up to the end of the previous accounting year.
- A second period beginning from the date after the previous period to the end of the new period.
- The next year of assessment following the year of change in which the company has a full basis period which is not overlapping.[i]
Example to Illustrate
XYZ prepares accounts to 31st December each year. In January 2016, the company applied to the Commissioner General to change its accounting date to 30th September each year.
The company presented three accounts
|Year to 31/12/2015||GHS 200,000|
|Year to 30/09/2016||GHS 300,000|
|Year to 30/09/2016||GHS 450,000|
Determine the chargeable income for the relevant years
|Year of assessment||Period|
|2015||1/1/2015 – 31/12/2015||GHS 200,000|
|2016||1/1/2016 – 0/09/2016||(9/12 x 300,000) = 225,000|
|2017||1/10/2017 – 30/09/2017||450,000|
Note: The income for the 3-month period from 1/10/2015 – 31/12/2016 (3/12 x 300,000) was taxed in the 2015 year of assessment,and therefore, will not be taxed again in 2016.
Source: The example and solutions are from the Ghana Revenue Authority, Practice Note on Change of Accounting Date under the Income Tax Act, 2015 (ACT 896)
How to apply for a change in accounting date with the tax authorities
- The entity applying must be a company or a trust.
- The company must apply to the Commissioner General for approval to change the accounting year, stating the reason for change.
(It must also show it intends to deal with the transitional period between the “old Accounting year” and the “new Accounting year” so there is no gap or overlap in tax).
- The company must have settled all taxes, interest, or penalties due or arranged with the Commissioner General to settle the outstanding debts (if any).
- All directors of the company should have filed and paid all relevant taxes.
When you change your accounting dates, you must consider how you will deal with the gap or overlap in tax paid. Therefore, you must plan so you determine the gap or overlap and decide how you will deal with it.