Ever wondered why the financial year and calendar year are completely out of sync? Nope, it’s not due to poor planning. The difference between the two is actually for very good reason. And with tax time fast approaching, we thought we'd dive into the ins and outs of the financial year and why it's separate from the calendar one.

How the financial year came to be

The roots of the financial year stretch back to ancient times. For instance, the Roman Empire's fiscal year began on 1 January, but medieval European states often picked start dates aligned with agricultural cycles and tax collection schedules. This practice allowed governments to synchronise their fiscal planning with the rhythms of agricultural production, ensuring that taxes were collected after harvests when farmers had the means to pay.

As economies grew more complex, different sectors began adopting fiscal years that best suited their specific business cycles. This led to the diverse financial year start dates we see today.

Fast forward to modern times, and you'll find that countries select their fiscal years based on unique historical, economic and administrative reasons.

Take the United Kingdom, for example. Its financial year runs from 6 April to 5 April. These dates are a quirky legacy from the 1752 switch from the Julian to the Gregorian calendar, which required an 11-day adjustment.

Meanwhile, in the United States, the federal fiscal year begins on 1 October and ends on 30 September. This change, made in 1977, provides extra time for thorough budget planning and execution. In contrast, their tax year is the calendar year: 1 January to 31 December.

Businesses, on the other hand, often choose financial years that align with their operational cycles, which might not sync with the calendar year. This alignment aids in more accurate financial planning, budgeting and performance evaluation, mirroring the business's revenue and expense cycles.

Why do the financial year and calendar year run over different dates?

First and foremost, aligning the financial year with a company’s business cycle makes a lot of sense.

In the world of business, financial years can vary between sectors and individual companies. For instance, retailers often end their financial year after the bustling holiday season when sales skyrocket. This timing allows them to capture the most lucrative part of their revenue in a single fiscal year, providing a clearer snapshot of their annual performance.

Similarly, in the education sector, many institutions end their financial year in June, aligning with the academic calendar. This timing helps them account for tuition fees, grants, and other revenues within the same period, offering a more accurate reflection of their financial status.

Governments also have their reasons for setting a financial year that differs from the calendar year. Let’s look at the United States again as a good example. This schedule aligns with budget planning and funding allocation processes, ensuring smooth financial management for public services and projects. However, most US companies and individuals focus on the calendar year, which aligns with the US tax year. This generally makes for more simplistic tax planning.

Historical and traditional practices can't be overlooked either. Many organisations have stuck with a particular financial year for decades. Changing this would mean overhauling their entire accounting, reporting and planning systems – a daunting and costly task.

Finally, multinational corporations often need to sync their financial year with their global operations. Adopting a financial year that aligns with their major markets or international headquarters ensures consistency in reporting and financial management across different regions.

In a nutshell, the difference between the financial year and the calendar year is all about efficiency and practicality. It allows businesses and governments to manage their finances in a way that best suits their specific needs and operational rhythms.

What's the deal with Australia's financial year?

Unlike the US and UK, Australia’s financial year runs from 1 July to 30 June. It differs from the calendar year for several intriguing reasons rooted in history, practicality, and seasonal alignment.

Back in the colonial days, each Australian colony had its own parliament and treasury. These treasuries found it inconvenient to present their financial reports at the end of the calendar year. This is because it coincided with the summer holidays and Christmas, times when parliamentarians were typically on holiday. So, they opted for a financial year that ended on 30 June, ensuring reports were ready when Parliament was in session​.

When Australia federated in 1901, this practice was adopted by the newly formed Commonwealth of Australia. The reasoning was simple yet effective: it avoided the holiday season, making it easier for parliamentary review and planning. It also allowed for better alignment with the agricultural cycle, crucial for a country with a significant agricultural sector, thereby aiding in economic planning and budgeting.

As well, the mid-year wrap-up aligns with the practical needs of the government and businesses. It helps Parliament review finances without interruptions and manage financial activities smoothly, avoiding major holiday distractions.

Why the financial year matters to long-term investors

The financial year is a crucial concept for long-term investors . Its importance goes beyond just dates; it can influence investing strategies and financial planning.

One key reason the financial year matters is its alignment with a company's business cycles. Unlike the calendar year, a financial year can be customised to match the specific operational rhythms of various industries. This alignment offers investors a more accurate snapshot of a company’s financial health and performance, enabling better year-on-year comparisons and a clearer understanding of seasonal trends affecting earnings.

Plus, the financial year enables investors to anticipate key financial events such as earnings reports, dividend distributions, and major expenditures.

The financial year is also important when it comes to tax time. It sets the timeline for all tax-related activities, including the filing of tax returns and the calculation of tax liabilities and refunds. For investors, this period is crucial for overseeing tax obligations.

With the end of the financial year approaching, you’re likely already preparing for tax time . The process can be complex, especially if you invest. If you ever need assistance navigating your tax liabilities, reach out to a tax accountant for personalised advice.

Happy investing!