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By Franklin Law Senior Associate, Petrea Parkhill
For many businesses, the end of the financial year (EOFY) is a deadline to survive. Now the dust has settled, it is worth taking a step back. What EOFY often reveals is not just your financial position, but the strength, or weakness, of your underlying legal and tax structures.
Inland Revenue has now significantly increased audit and enforcement activity, with a clear
focus on small and medium businesses. These audits are increasingly data-driven by targeting inconsistencies, unusual patterns, and industry outliers. In this environment, EOFY should be viewed as a stress test.
Common issues tend to be gaps in documentation, transactions that cannot be clearly explained, and movements between entities that are not properly recorded. These are often not intentional, but they create real exposure when reviewed after the fact.
One of the most frequent areas of concern are shareholder and related party transactions. EOFY often brings these into focus, particularly where drawings, advances, or intercompany transfers have been treated informally throughout the year.
If such arrangements are not properly documented and supported by clear terms, they can be recharacterised. What was intended to be a loan may instead be treated as income or a
distribution, with corresponding tax consequences.
There is also a practical lesson around security. Where funds have been advanced between
related entities, or even within a group, those positions should be documented and, where
appropriate, secured. Without that, the ability to enforce repayment, or even retain priority in aninsolvency scenario, is significantly reduced.
The key takeaway from EOFY is not simply whether your accounts have been filed; It is whether your position is defensible. That means documentation prepared at the time transactions occur, not reconstructed later, and that your agreements reflect what is actually happening in practice.
At Franklin Law, we take a collaborative approach and work alongside clients and their
accountants to review these issues and ensure that legal and tax positions are aligned.
